A FTSE 100 stock over sold?
A look into the recent results of Reckitt Benckiser Group Plc (LON: RKT)
Dear reader,
Lets this week dive into a stock that caught my attention with their most recent news around the baby formula and the share price hitting new lows.
The stock: Reckitt Benckiser Group Plc (LON: RKT)
Reckitt plc is a global consumer health, hygiene, and nutrition company with a diverse portfolio of brands. The company’s core portfolio includes Mucinex, Strepsils, Gaviscon, Nurofen, Lysol, Dettol, Harpic, Finish, Vanish, Durex, and Veet.
These brands have delivered a 7% net revenue compound annual growth rate (CAGR) from FY2018 to FY2023, with a gross margin of 61% in FY2023. Additionally, Reckitt manages emerging brands like Move Free and Biofreeze and local brands such as Lemsip, Airborne, KY, Veja, Jik, Tempra, and Jontex.
Reckitt’s Financial Ratios:
Financial Performance Overview
Revenue and Profitability:
In the first half of 2024, Reckitt Benckiser Group Plc reported a modest increase in like-for-like (LFL) net revenue growth of +0.8%. However, total net revenue declined by -3.7% to £7,167 million, mainly due to a -4.2% impact from foreign exchange fluctuations and a -0.3% net impact from mergers and acquisitions (M&A). This decline contrasts with the LFL growth, showing that currency effects and business adjustments significantly affected the overall revenue.
Segment Performance:
Hygiene: This segment achieved a +4.5% LFL revenue growth, reaching £3,060 million. Hygiene saw a 0.9% increase in volume and a notable +3.6% rise in price/mix improvements. Key brands like Lysol and Finish drove this growth despite competitive pressures. The adjusted operating profit for Hygiene rose by 18.6% at constant exchange rates, reflecting successful brand investments and marketing efforts.
Health: Health’s LFL revenue growth was +1.3%, amounting to £2,941 million. This growth was driven by strong performance in Intimate Wellness and VMS, though it was partially offset by declines in seasonal over-the-counter (OTC) brands such as Mucinex and Strepsils. The adjusted operating profit decreased by 7.1% on an actual basis, impacted by increased brand equity investments and rising costs.
Nutrition: The Nutrition segment faced a significant -9.0% LFL revenue decline, totaling £1,166 million. This decline was primarily due to the lapping of high market shares from the previous year’s competitor supply issue. The adjusted operating profit for Nutrition fell sharply by 30.9%, reflecting reduced volumes and the impact of the US market’s supply dynamics.
Gross and Operating Margins:
The gross profit margin increased by 120 basis points to 60.6%, driven by improved pricing and lower freight costs. However, this margin expansion was partly offset by higher brand equity investments and increased fixed costs. The adjusted operating profit margin slightly decreased by 30 basis points to 23.5%.
Cash Flow and Shareholder Returns:
Reckitt plc generated a free cash flow of £821 million, marking an 8% increase from the previous year. The company returned £1.583 billion to shareholders through dividends and share buybacks, reflecting a 100% increase compared to the previous period. The next share buyback programme will commence with £1 billion planned for the next 12 months.
*Reckitt Share price over 5yrs
Second Quarter Insights
In the second quarter of 2024, the company’s LFL net revenue was flat, showing a +2.2% improvement in price/mix but a -2.2% decline in volume. Key highlights include:
Hygiene: LFL revenue growth was +1.9%, although volumes were impacted by a reversal of a previous benefit related to a SAP implementation in Brazil. Growth was driven by brands like Lysol and Finish.
Health: LFL revenue growth was +1.7%, with broad-based growth offset by weaker seasonal OTC sales and retailer destocking.
Nutrition: This segment experienced an -8.1% LFL revenue decline, largely due to the impact of the competitor supply issue in the US.
Full-Year Outlook
Reckitt plc has revised its full-year outlook for 2024, expecting LFL net revenue growth of +1% to +3%, down from the previous forecast of +2% to +4%. This adjustment is due to a temporary supply disruption in the Nutrition segment caused by a tornado at the Mount Vernon warehouse. Despite this, the company remains confident in its resilience and expects revenue growth to accelerate in the second half of the year. Operating profit is still targeted to grow faster than net revenue.
Technical Guidance:
Net Finance Expense: Expected to be £300 million to £320 million.
Tax Rate: Anticipated to be between 25% and 26%.
Capital Expenditure: Projected at 3% to 3.5% of net revenue.
Foreign Exchange Impact: If current rates persist, a negative impact of approximately -3.5% on net revenue and -4.5% on diluted EPS is expected.
Regional Performance
North America: Experienced a -4.6% decline in LFL net revenue, with notable impacts from declines in seasonal OTC brands and competitive pressures.
Europe / ANZ: Saw a +3.9% increase in LFL net revenue, driven by broad-based growth across Hygiene and non-seasonal OTC Health brands.
Developing Markets: Achieved a +3.3% increase in LFL net revenue, supported by strong performances from Dettol and Durex in South Asia and Greater China.
Strategic Actions
Reckitt plc is undergoing a strategic reshaping to focus on high-growth, high-margin Powerbrands. The company plans to exit non-core brands and simplify its organizational structure to enhance efficiency and speed. This strategy aims to create long-term value for shareholders through a sharper brand portfolio and a more streamlined operation.
Baby Formula:
Reckitt's stock fell to its lowest point in over ten years on Monday after a US jury ruled against Abbott Laboratories in a lawsuit concerning health issues from premature infant formulas. Reckitt’s shares dropped 9.6% following the news that a Missouri jury awarded $495 million to a mother whose child suffered brain damage from an Abbott product.
Earlier this year, Reckitt’s shares had fallen by up to 20% after a similar case where a jury awarded $60 million to a mother whose baby died from Enfamil formula made by Reckitt’s Mead Johnson. Reckitt is challenging the verdict, arguing it lacks scientific support. While breast milk is known to lower NEC risk in premature infants, specialized formulas are sometimes the only option.
Investors are waiting for the outcome of the next trial to gauge if the March verdict against Reckitt could lead to a prolonged class action. Multiple similar lawsuits have been filed against Mead Johnson and Abbott in US state and federal courts.
Conclusion:
This stock is definitely one to watch. With the recent sharp drop bringing it back to 2013 levels, it might present a solid buying opportunity. I'd suggest waiting for the P/E ratio to decrease further to avoid paying too high a premium, though a positive trading update might influence me to buy sooner.
In the long run, investors will closely monitor this stock and the ongoing lawsuits, which could potentially incur significant costs for the company. It's worth considering that some of this risk might already be factored into the current share price. While there could be a bargain here, the investment comes with notable risks.
Is this a potential value opportunity or just another falling knife?
Thanks for reading,
Ollz