Reckitt shares are undervalued

Reckitt shares have struggled in recent years, but the consumer-goods giant is now getting its act together.

Reckitt logo displayed on a phone
(Image credit: © Alamy)

FTSE 100 firm Reckitt (LSE: RKT) is split into three divisions: health (where key names include Clearasil, Dettol, Durex, Gaviscon, Nurofen and Strepsils); hygiene (Air Wick, Finish, Harpic and Vanish); and nutrition (infant formula brands Enfamil and Nutramigen). The products are leaders in their field and available in 200 countries.

It is difficult to find a company more defensively positioned – more immune to the economic cycle, in other words – anywhere.

Between March 1999 and mid-2017, Reckitt gave shareholders a stunning 12-fold return, even excluding dividends.

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Reckitt’s patchy profits

Why, then, have Reckitt shares tumbled by almost 30% since that June 2017 peak? After all, net revenue growth over the five years to the end of December 2021 averaged 8% a year.

One big fly in the ointment has been the company’s very patchy profits performance. The group’s headline earnings per share (EPS) figures have been all over the place.

Investors are also concerned about competitive pressures as retailers’ own brand products edge in on its market shares.

What’s more, the firm has made several self-inflated errors in recent years.

In 2019, for example, CEO Laxman Narasimhan acknowledged “several areas where we’ve underinvested and overstretched people and assets. At the top line, we’ve had real issues delivering growth, particularly in health”, which “faltered [and] became large, unwieldy and unfocused. We missed important innovations [and] some pricing decisions backfired.”

Investors have moved away from Reckitt shares

So, where does this leave the business now?

Reckitt has just announced third-quarter figures. Group like-for-like (LFL) sales grew by 7.4%, with price rises partly offset by a 4.6% dip in sales volumes.

Despite the challenging global economic climate, Reckitt is pushing ahead.

Interim CEO Nicandro Durante said, “My priority is firmly focused on continuing to… deliver sustainable mid-single digit growth, and mid-20s adjusted operating margins by the mid-2020s.”

As the company gets its act together, Reckitt shares are becoming more appealing.

According to City analysts, the stock is trading at a forward price/earnings (p/e) multiple of 18 for 2022, falling to 16.4 next year. That looks quite cheap for a high-quality growth stock with a portfolio of valuable consumer goods brands.

What’s more, the group has maintained its dividend since 2019. If this pay-out is held steady this year, the prospective yield would be 3%.

For UK investors the firm also has appeal as an international champion. Just 6% of last year’s sales came from the UK, which means its earnings are insulated from sterling volatility. In fact, if the pound continues to depreciate Reckitt’s bottom line would receive a boost.

Reckitt shares are much cheaper today than they were in 2017, and for the past couple of years, the company has deserved a low valuation. But now the firm is getting its house in order, the stock could soon start to regain its former valuation – which in turn would spark a major price rebound.

Rupert Hargreaves

Rupert was the former Deputy Digital Editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. 

His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks. 

Rupert has freelanced as a financial journalist for 10 years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them. 

He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service. 

He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.