HB Fuller – Blaming SAP, But Where Is The Growth?
HB Fuller is taking a beating this morning after a serious earnings miss. This was a company we were not paying much attention to given relatively fair value and its only interesting screen was a high level of skepticism, suggesting that investors did not believe that recent high returns on investment were sustainable – seems they were right!
FUL is blaming an SAP integration and implementation delay for the miss and this brings back a sense of nostalgia for us. In the 1990s we would see at least one company per quarter raise the specter of SAP as a reason why they had disappointed. It was a more frequent excuse than overspending at times! And SAP is the gift that keeps giving, as part of the very high expense of separating DD’s performance chemicals business from the rest of DD is unravelling the SAP system such that each company has its own, disconnected from each other.
But – ignoring SAP for a moment and looking at the numbers – there is little evidence in FUL’s numbers that the US is in much of a growth phase. Adhesives have many industrial applications and consumer/retail end-uses, and for FUL to show only 2% organic growth in the US in this business is concerning. We think that it is a function of a couple of things that we have talked about at length – the fact that growth IS slow in the US despite all the stimulus and the better employment rates, and specific to FUL, high energy costs drive high prices and high prices drive lower demand as buyers focus on minimizing use, minimizing waste and finding alternates.
Oil prices are falling, and this will likely cause pricing to decline, which ultimately could be good for FUL – however, and see recent research, as oil prices fall we often see coincident apparent demand fall for chemicals (chart), as buyers delay purchases in the hope that lower energy prices mean lower chemical prices in the near future.