HB Fuller Company analysis: Technology leader in adhesives grinds its teeth for growth

The chemical segment usually hides rather long-term stable giants that generate massive profits and maintain their position. However, sometimes you can also find a predator that wants to grow further. This is the case of HB Fuller Company, which we will look at today.

Basic overview

HB Fuller Company $FUL+0.7% is a global manufacturer of specialty chemical products, adhesives and sealants that was founded in 1887. The company is headquartered in Minneapolis and employs more than 4,500 people worldwide.

HB Fuller offers a comprehensive portfolio of private label products including industrial adhesives, consumable, medical, construction and packaging adhesives. Its products are used in a wide range of industrial and end markets including automotive, medical, packaging, electronics, scientific and construction.

FUL
$77.72 $0.54 +0.70%

Capital Structure

Market Cap
4.25B
Enterpr. Val.
6.13B
Revenue
3.55B
Shares Out.
54.63M
Debt/Capital
0.52
FCF Yield
6.04%

Valuation / Dividends

P/E
24.06
EPS
3.23
P/S
1.19
P/B
2.32
Div. Yield
1.10%
Div. Payout
25.47%

Capital Eff. / Margins

ROIC
6.79%
ROE
10.21%
ROA
3.67%
Gross
30.48%
Operating
11.15%
Net Profit
5.15%
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HB Fuller is a global leader in specialty chemical products with annual sales of over $3.7 billion. It has 19 manufacturing facilities around the world, as well as research centers in North America, EMEA and Asia. It has a strong focus on innovation and has been awarded more than 4,500 patents over the years.

The company's strategy focuses on growth through product innovation, portfolio expansion and expansion into new customers and markets. HB Fuller is committed to sustainable and ethical operations, has led the way in low carbon products and has become a signatory to the UN Global Compact.

HB Fuller Company is a specialty chemical manufacturer focused on growth and innovation. It has a strong global market position in adhesives and applications that support advanced solutions for customers in strategic industries around the world.

Sector

The global industrial adhesives market is very large and has great potential for growth.

The market is segmented into different segments based on product type, properties, and application. For example, aqueous adhesives, solvent adhesives, pressure sensitive adhesives, heat curing adhesives, etc. Different segments are growing at different rates based on the maturity and adoption of innovations in the industries where they are used.

The four most important factors influencing the market growth are:

  1. Growth of the automotive industry, especially electric vehicles. Adhesives are critical for automotive manufacturing.
  2. Industrial automation and robotics. Adhesives enable precision assembly of components.
  3. Increasing demand for sustainable and eco-friendly products. More companies are turning to waterborne and low-VOC adhesives.
  4. Development of new biomaterials. Precise and safe adhesives are needed for applications with new materials such as bioadhesives.

The five largest companies in the market (Henkel, H.B. Fuller, 3M, Bostik, DowDuPont) dominate this market and together have a market share of approximately 50%. Many of these companies are adopting innovation and growth strategies through mergers and acquisitions, research and development, product extensions, and geographic expansion.

Opportunities for growth in this sector include sustainable adhesives, high-performance industrial adhesives, adhesives for renewable materials and 3D printing, among others. The main threats are pricing pressure, competition from Asia and potential disruption from technologies such as ultrasonic bonding.

Competition

I have already briefly mentioned these, but now in more depth.

Henkel is the global leader in the adhesives sector with annual sales of around €20 billion. Its Adhesive Technologies division, which produces a wide range of adhesives and sealants, is HB Fuller's biggest competitor. Henkel has a stronger position in Europe, while HB Fuller leads in North America.

3M $MMM+0.4% is a renowned global technology company that has gained a very strong position in adhesives and laminates through acquisitions. 3M Adhesives and Tapes division competes with HB Fuller with innovative solutions for various industrial and consumer markets. However, 3M is a larger and more diversified company than HB Fuller.

Bostik, a division of multinational French group Arkema, provides a broad portfolio of adhesives and packaging materials for the industrial, construction and end-use industries. Bostik operates globally with a significant presence in many of the regions where HB Fuller operates. Although Arkema is a larger company, Bostik has a highly focused adhesives portfolio that is similar to HB Fuller's.

DowDuPont is a global chemicals and materials giant whose Electronics & Construction Materials division produces specialty adhesives, laminates and paints for industrial and technical applications. Although DowDuPont is mentioned among its main competitors, its division is less related and focused on adhesives than HB Fuller, Henkel or 3M.

In summary, Henkel and 3M are currently HB Fuller's largest and most direct competitors. They have a stronger global presence and resources, but HB Fuller leads in adhesive specialization and innovation and has a long-term growth strategy. Bostik is also a significant regional competitor, while DowDuPont is not as directly focused on this market.

Current situation

I think it's worth noting that Fuller has not had the best track record when it comes to meeting its own internal projections and achieving impressive margins. On the other hand, at least they've been able to increase EBITDA.

Analysts expect EBITDA to be slightly above 15% in FY23, with the near term being slightly impacted but improving over time as the company continues to upgrade its product portfolio.

FCF declined. Source

Net income actually fell from $171.2 million in 2018 to $130.8 million in 2019. It then fell further to $123.7 million in 2020. However, in 2021, as sales improved, so did profits, which climbed to $161.4 million. Moreover, the company seems poised for really nice growth in several segments.

The first segment worth mentioning is hygiene, medical and consumer adhesives. This includes the production of flexible packaging, graphic materials and envelopes. Last year, this segment accounted for 45% of the company's sales and a respectable 55% of profits.

Next in line is the Technical Adhesives segment, which provides high-performance adhesives for transportation, electronics, healthcare, clean energy, aerospace, defense and other related markets. These account for approximately 42% of the company's revenue and 54% of its profit. Management expects growth in both.

The dividend is a relatively modest 1.19%. On the other hand, that translates to a reasonable payout ratio of 0.25. But it's also extremely stable, and the company has been raising and paying it for a long string of years. At the moment, the company doesn't even seem to have a problem managing the dividend any further, or stop increasing it.

In somewhat negative news, FUL is also diluting its shares and floating more. Any investor would understandably like to see the exact opposite. That is, that it will buy them back to increase the value to investors.

H.B. Fuller has proved remarkably resilient. In 2020, when the pandemic caused a sharp recession, the industrial manufacturer saw a tiny 4% decline in earnings per share.

But H.B. Fuller proved vulnerable to the Great Recession in 2009. During that recession, its earnings per share plunged 79% and its stock price fell 66% in less than six months. Thus, if a severe recession does occur, investors should brace themselves for a volatile share price and possibly a significant drop in earnings. While H.B. Fuller's current business dynamics do not warrant concern, the company's sensitivity to a recession is a risk factor to keep in mind.

What do you think? Is this a player that will grab huge momentum through innovation?

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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