Shares in consumer goods manufacturer Reckitt Benckiser (RB.) continued their steady descent, hitting a fresh two-year low after the promise of a return to revenue growth in 2018 failed to excite investors.
Shares in the maker of Durex condoms and Dettol cleaning products fell 6.6% to £61.33 on Monday and are now 24% off their June high of £81. The company reported flat like-for-like sales of £11.5 billion in 2017. Profits were up year-on-year at £2.5 billion, as was the dividend to 164.3p per share.
Rakesh Kapoor, chief executive, said revenue growth would move into positive territory in future, at 2-3%, after “a solid finish to the year”. He also promised an expansion in medium-term operating margin, though shied away from any specific targets.
Further, the company, which also owns brands such as Air Wick and Nurofen, raised guidance on the synergies it expects from its June acquisition of US baby formula maker Mead Johnson by 20% to $300 million.
But broker UBS said investor expectations had been high due to a strong cold and flu season, meaning the results were “unlikely to convert the sceptics into buyers”. Indeed, despite its shares having pared back, the forward valuation still looks demanding at 18 times 2018 earnings with a modest 2.8% dividend yield.
While UBS said it remains neutral on the stock, both Morningstar analyst Philip Gorham and The Share Centre are more positive.
Gorham rates Reckitt four stars, suggesting it’s undervalued with a fair value estimate of £74. Gorham finds positivity in the Mead Johnson buy and the disposal of its foods segment. He says Reckitt’s focus on consumer health and its entry into infant formula will help it maintain pricing power for several years to come.
Graham Spooner, investment research analyst at The Share Centre, says he’s long been a fan for low-risk investors, despite its high rating. “We believe that the fall off in the share price could provide investors with a more attractive entry point,” he says.
Funds Hit by Reckitt’s Decline
Reckitt’s largest shareholder continues to be JAB Holdings. The German conglomerate owned 16% of the company 10 years ago, but has been selling down its stake and now retains less than 6% of shares. Last month it confirmed a deal to snap up Dr Pepper Snapple for $18.7 million.
But Reckitt continues to be widely held by fund managers, with Terry Smith’s Morningstar Gold Rated Fundsmith Equity owning around 2.5 million shares, according to Morningstar direct data. It represents 1.93% of the portfolio currently.
The Morgan Stanley Global Brands Fund has a large weighting, with its 1 million shares accounting for 6.3% of the portfolio. Elsewhere, the Bronze Rated Liontrust Special Situations Fund, managed by Anthony Cross, has around 1.5 million shares.
Other holders include BlackRock UK Focus, Fidelity Enhanced Income and Carl Stick’s Bronze Rated Rathbone Income.
