Reckitt Benckiser: Revenue Growth Ahead of Expectations; Shares Cheap Amid Litigation Uncertainty

Wide-moat Reckitt Benckiser reported first-quarter like-for-like revenue growth of 1.5%, significantly ahead of the 0.9% decline expected in the company-compiled consensus. The main driver of the delta was the nutrition segment for which the drop in sales was milder than previously expected, reporting a 9.9% decline compared with a 14.5% consensus decline. The segment is lapping the peak level of market share recorded in the prior year on account of the infant formula supply challenges faced by narrow-moat Abbott as well as the retail inventory buildup in the first quarter of last year. With a good start to the year, management reaffirmed the full-year 2024 outlook for 2% to 4% like-for-like sales growth, which now looks achievable given that the comparison base for the nutrition segment will get easier as the year progresses. The guidance is aligned with our forecast which sits toward the lower end of the range, and we confirm our GBX 6,700 fair value estimate. The share price was up around 5% in intraday trading given the revenue beat. Still, we think the stock remains significantly undervalued, trading at less than 14 times 2024 earnings. We believe the weakness can be primarily attributed to the uncertainty around the potential liability the group could face in the legal proceedings concerning its premature milk formula products. The share price is down almost 20% since mid-March when an Illinois jury awarded USD 60 million to a mother whose preterm baby died from necrotizing enterocolitis complications allegedly linked to the consumption of the company's Enfamil premature formula. We believe that the impact on market capitalization is likely greater than any potential settlement the company might face down the line. Still, we expect the uncertainty around this situation will remain elevated for a prolonged period as additional state cases will commence in the fall, while a judgment on the appeal for the Illinois case and other federal cases should take longer.