Is Reckitt Benckiser Group plc a falling star to avoid or a great buy?
The shares of consumer goods company Reckitt Benckiser Group(LSE: RB) are down another 6% or so today on the release of full-year results. The slide has been ongoing since the summer and the stock languishes around 22% below its June peak.
Yet today's figures are encouraging. Constant exchange rate revenue from continuing operations for 2017 are 15% higher than the year before and adjusted earnings per share rose 10%. The directors seem pleased with progress and raised the full-year dividend by 7.2%, suggesting confidence in the outlook. So the big question now is, should we view Reckitt Benckiser as a falling star to avoid or a great buy at this new, lower level of the share price?
A return to growth
Commenting on the results, chief executive Rakesh Kapoor told us that the firm "returned to growth after a solid finish to the year." He said the acquisition last summer of Mead Johnson Nutrition Company (MJN) allowed the creation of two divisions - RB Health and RB Hygiene Home - which he anticipates will drive long-term growth. Putting figures on that, the company is aiming for total growth in revenues of 13% to 14% during 2018 of which 2% to 3% will probably be like-for-like increases. However, he warned that some "specific factors" could affect margins in 2018, and I think that warning could be what's spooking the market today.
The medium-term outlook for profit margins is for moderate expansion. The directors think that the acquisition of MJN "means more than 50% of revenue now comes from higher-margin consumer healthcare brands." The acquisition is just one way that the firm has been addressing what it calls an "operating margin decline." On top of that, the company is working on efficiency improvements, which should combine with incremental synergies to get margins growing again.
A challenging and volatile year
The firm admits that the trading year was challenging and volatile but said that strong generation of cash and the sale of its RB Foods business allowed the paying down of £4bn of debt during the second half of the year, which is great news. From this strengthened financial position, the directors think that ongoing product innovation and renewed impetus from the dedicated leadership and investment in its two new divisions will unlock long-term growth and the creation of value.
I reckon that, along with other defensive firms, this one has been slipping because of over-valuation. I think we are seeing a rotation of investors out of defensive firms, which had become expensive, into cheaper-looking cyclical stocks. In the case of Reckitt Benckiser, I wonder if the fall has further to run. This remains a great, attractive company in the consumer goods space, but the valuation is still high. At a share price of 6,232p, the price-to-earnings ratio for 2018 sits close to 18 and the forward dividend yield is around 2.8%. The extent of the share-price slide over the last few months has not yet been as large as some of the company's defensive peers, so I'd put the stock on my watch list and treat it with caution for the time being.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.