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Questor: Reckitt Benckiser once exuded vim and vigour but now looks a little peaky
Questor share tip: the healthcare giant still cannot shake off sluggish growth despite carving itself into two divisions
The most frustrating part of being ill is falling prey to the same ailment time and again. If only the patient had increased the dosage in the first place, they might have avoided a relapse.
Reckitt Benckiser once exuded vim and vigour, created by merger in 1999 and augmented with promising brands including Strepsils and Durex condoms over the years. These days it looks a little peaky and unsteady on its feet.
In common with a number of other consumer goods companies, Reckitt’s repeat complaint seems to be sluggish growth. Two years ago the company reined in annual like-for-like sales growth guidance from 3pc to 2pc. In the event, there was no growth at all. Last year was better, as the company posted a 3pc rise. But investors wonder whether 2019 could be another disappointment.
Reckitt’s own health is often predicated on someone else feeling under the weather. So a mild cold and flu season in the United States and several European markets spelt bad news for the Mucinex owner in first-quarter trading. The firm reported just 1pc underlying growth, but stuck to its target of 3pc-4pc for the year.
Analysts at Goldman Sachs already expect it to come in at the bottom end of that range, so Reckitt has little wiggle room.
It is not a great time to be in consumer goods. Investors thought the biggest brands would never go out of fashion but shoppers have been turning their backs on staples in favour of healthier, small-batch alternatives or cheaper private-label options.
However, some of the largest grocery groups have seen their shares tick up this year on hopes of better times ahead. At Unilever, new boss Alan Jope is bullish about sharpening performance at the Dove-to-Magnum maker, while KitKat owner Nestlé is awash with cash after selling its skincare unit for 10.2bn Swiss francs (£8.1bn).
The poster child is Coca-Cola Hellenic Bottling Company. For two years running revenue growth has come in above the group’s 4pc-5pc target and the shares are already up by 5pc since our tip last month.
Reckitt has not been idle, carving itself into two independent business units, one for health and one for household brands including Finish, Vanish and Harpic. But it still looks like a laggard, with its shares declining twice as much as the FTSE 100 since Questor advised readers to steer clear in October 2017. The stock is off a fifth from its peak.
To some extent, a company the scale of Reckitt can always buy growth by pulling levers and stepping up investment. So far the management says that is not on the cards, guiding to flat operating margins this year. It remains to be seen how long it can hold the line.
Aside from the headline figures in the last update, analysts at RBC Capital Markets were concerned by the flat performance of vitamins, minerals and supplements, as well as footcare brand Scholl, where there were no “extraneous factors” such as a poor flu season to take into account.
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At least infant formula maker Mead Johnson, whose expensive acquisition just about halved the group’s return on capital, is performing better despite lower birth rates in China.
Nothing much will change until the company has identified a successor to chief executive Rakesh Kapoor, who is due to leave by the end of the year. Meanwhile, the firm is on alert after its former division Indivior was charged by the US Department of Justice with using fraudulent marketing to boost sales of its opioid addiction treatment.
Reckitt, which owned Indivior until 2014, warned that the final cost of the investigation might be “substantially higher” than the $400m (£315m) provision made in 2017.
Trading at 18.5 times this year’s forecast earnings, Reckitt is cheaper than some of its peers but its prospects look underwhelming. What would make things interesting is if an activist investor arrived on the share register, agitating for change that could involve the disposal of smaller brands or even a straight demerger of health from home.
But buying in the hope of corporate activity is a risky business. And as anyone lying in the sick bay knows, there are no miracle cures. Best to hold off for now.
Questor says: avoid
Ticker: RB
Share price at close: £63.95
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