Could these FTSE 100 stars disappoint investors in 2017?

Admiral insurance TV advert dolls

Knowing when to sell is one of the toughest problems in investing. For example, shares of consumer goods group Reckitt Benckiser Group (LSE: RB) have doubled over the last five years but sales and profit growth haven't kept up with Reckitt's share price. The stock now trades on a P/E of 24, compared to a P/E of about 14 in 2012.

Is Reckitt now overvalued, or do its high profit margins and strong cash flow mean that it deserves a premium valuation?

$17.9bn deal could change the picture

One of Friday's big corporate stories was confirmation of Reckitt's acquisition of US formula milk company Mead Johnson for a total of $17.9bn. That's a fairly full valuation of 17.4 times earnings before interest, tax, depreciation and amortisation (EBTIDA).

Reckitt will take on a total of $20bn of new debt to fund the deal. This will transform the group from a low-debt business to one with a high level of gearing. To help speed up repayment rates, there will be no more share buybacks until "the debt level is materially lower".

Reckitt has repurchased nearly 5% of its own shares since 2011, providing a helpful tailwind for earnings per share. Management expects the contribution from Mead Johnson to make up for this shortfall. The acquisition is expected to make a double-digit percentage addition to earnings per share by the third year of ownership.

Reckitt has managed major acquisitions successfully in the past. I suspect Mead Johnson will prove a decent buy. But it might take a few years for the benefits to reach shareholders.

Cautiously optimistic

The group's 2016 results were also published on Friday. These were broadly as expected. Like-for-like sales growth was just 3%, but adjusted net income rose by 15% to £2,157m, thanks to favourable exchange rate movements. The total dividend rose by 10% to 153p, giving a 2.1% yield.

In my view Reckitt Benckiser remains a reasonable bet for long-term income growth. But the stock's forecast P/E of 22 and below-average dividend yield mean that it's not cheap. I believe the shares could underperform in the short term.

Should you follow the founder and leave?

Motor insurance firm Admiral Group (LSE: ADM) has been a cracking investment over the last five years.

The share price has risen by 95% and shareholders have received dividends totalling 439.4p per share. For anyone who invested in February 2012, that equates to a 45% cash yield to date.

The problem is that growth is slowing. The UK market is competitive and overseas ventures are struggling to turn a profit. Consensus forecasts suggest that Admiral's earnings per share rose by 3% in 2016 and will rise by just 1.5% in 2017. This could leave the shares looking a little pricey, on a forecast P/E of 17.

A second concern is that Admiral's solvency ratio, a measure of surplus cash above regulatory requirements, fell sharply during the first half of last year. Dividend growth could come under pressure.

A final concern is that the group's well-respected founder, Henry Engelhardt, stood down last year.

I don't see Admiral as a compelling buy at current levels. I'd probably continue to hold for income, but investors looking for capital gains might want to consider taking some profits.

Our top FTSE 100 buys

I'm not the only Fool who believes Reckitt Benckiser remains an attractive long-term buy. Our expert analysts recently chose this consumer goods group as one of their 5 Shares To Retire On.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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