Company Reports

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.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition—a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birthrates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses—positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic—further secular declines in birthrates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Wide-moat Reckitt’s shares fell more than 15% in intraday trading March 15 after an Illinois jury ordered subsidiary Mead Johnson to pay $60 million in compensation to a mother whose premature baby died from necrotizing enterocolitis complications linked to consumption of the company's Enfamil infant formula. NEC is an intestinal inflammatory disease that primarily affects premature infants and can lead to death in advanced cases. According to Reuters, this trial is just the first out of potentially hundreds of similar lawsuits brought against Reckitt and Abbott, which produces Similac infant formula. This raises concerns that the total compensation that the company will be mandated to pay could end up substantially higher.

We are reducing our fair value estimate for wide-moat Reckitt by 3% to GBX 6,700/$17.10 for the ADR following disappointing results for fourth-quarter 2023 and a more negative-than-expected 2024 outlook. Management has guided for like-for-like revenue growth of 2%-4% for 2024. Although this is in line with company-compiled consensus of 2.9% organic revenue growth, it does have a different composition, with the nutrition segment expected to post a high-single-digit revenue decline and mid-single-digit growth for the other two segments, health and hygiene. This would require the health and hygiene segments to post higher-than-expected growth to compensate for the nutrition downside. This scenario is harder to fathom at this time given relatively weak volume momentum going into 2024 and lower pricing in the context of moderating input cost inflation.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition—a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birthrates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses—positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic—further secular declines in birthrates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

We confirm our GBX 5,900 fair value estimate for wide-moat Reckitt following a slightly disappointing third-quarter trading update and a strategic refresh that delivered few surprises but likely failed to impress investors. This was the first quarterly update with new CEO Kris Licht fully at the helm. His first stab at a strategic refresh suggested to us a continuation of the prevailing trajectory and guidance from the former management. The market was perhaps looking for a more meaningful change given the lackluster share price performance over the last year. The share price was down 2% in early trading and went down 6% after the analyst call. We believe the reaction is overblown, as we had anticipated that Licht, a company insider who was part of the last strategy update in 2020 as chief transformation officer, would not stray far from the prevailing strategy, at least for now. We believe the 2023 price/earnings multiple of around 16 times that the stock is currently trading at is not justified given Reckitt’s long-term growth prospects and margin profile, translating into a share price upside of around 20% from current levels.

Wide-moat Reckitt reported first-half 2023 like-for-like net revenue growth of 6.0% and an adjusted operating margin of 23.8%, both slightly ahead of company-compiled consensus of 5.8% and 23.4%, respectively. Still, shares were down on the print, which we believe is due to volumes being weaker than expected (volumes down 4.4% versus down 4.0% for consensus), and primarily driven by the hygiene segment (volumes down 8.9% in the first half), and due to management's cautious tone regarding the second half and what is expected to be a tougher competitive environment. Management confirmed the full-year top-line guidance of 3%-5% like-for-like net revenue growth for the group and increased the adjusted EBIT guidance to slightly above 2022 levels (from in line or slightly above previously) when excluding the one-off benefit of approximately 80 basis points related to U.S. nutrition. The EBIT margin guidance would basically translate into an operating margin slightly above 23%. Our forecast already assumed a 23.3% adjusted operating margin, which we are now more confident can be achieved given the relatively solid delivery in the first half. We confirm our GBX 6,900 fair value estimate and increase our U.S. share class fair value estimate to $17.80 from $17.10 on a stronger British pound. Shares are about 15% undervalued at current levels.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition—a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birthrates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses—positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic—further secular declines in birthrates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Wide-moat Reckitt reported first-quarter 2023 net revenue growth of 8%, significantly ahead of company-compiled consensus of 3.6%, driven predominantly by stronger-than-expected performance in the nutrition and health segments. In light of this, management clarified and increased full-year top-line guidance of 3%-5% like-for-like net revenue growth for the group (it was previously targeting mid-single-digit net revenue growth, before a negative 2.5% hit from the normalization of U.S. nutrition sales, which in aggregate we regarded as lower for the group). The company also announced on April 26 the appointment of a new CEO, company insider Kris Licht, president of its health segment and chief customer officer. We believe this appointment is largely positive given Licht’s involvement in Reckitt's strategic review (he previously served as chief transformation officer). We expect to see a smooth transition and continuation of the current underlying growth trajectory. We raise our fair value estimate by 3% to GBX 6,900 to reflect the strong first-quarter delivery and higher full-year expectations (we now expect 3% like-for-like revenue growth from 1% previously, with margin expectations unchanged). The U.S. dollar share class fair value increases to $17.10 from $16.20. Even after this bump in fair value, shares trade in 3-star territory with limited upside remaining.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition—a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birthrates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses—positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic—further secular declines in birthrates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Wide-moat Reckitt reported stronger-than-expected full-year 2022 results, with net revenue of almost GBP 14.5 billion and an adjusted operating margin of 23.8% (compared with GBP 14.3 billion and 23.3% in our forecast, respectively). We reconfirm our GBX 6,700 fair value estimate, as this slight overdelivery—mainly driven by an acceleration of pricing actions in the fourth quarter—has a limited impact on our valuation and our largely unchanged long-term forecast. Our U.S. dollar share class declines to $16.20 from $16.80 on a weaker British pound. At current levels, the stock is slightly undervalued, amid the uncertainty around the absence of a permanent CEO.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition--a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses--positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic--further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition--a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses--positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic--further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition--a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses--positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic--further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Wide-moat Reckitt’s third quarter trading update delivered few surprises, with the strong topline growth momentum continuing amidst hefty pricing actions, and management broadly reaffirming the full-year revenue growth and profit guidance. We believe the share price reaction to the print, to the tune of a 4% decline on the day—which we expect is the result of the relative volume weakness in the quarter—was slightly overblown, as we surmise the results still point to unwavering pricing power and overall low price elasticity. Therefore, we believe the current market value is an attractive entry point and we reiterate our GBX 6,700 fair value estimate. Our U.S. dollar share class declines to $15.40 from $16.20 on a weaker pound.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition--a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses--positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic--further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Although we believe the abrupt departure of CEO Laxman Narasimhan represents a loss for wide-moat Reckitt, we don’t expect to make any changes to our long-term outlook following the announcement, and we reconfirm our standard capital allocation rating and our GBX 6,700 fair value estimate. Despite his departure, we think Narasimhan’s effect on the firm and its strategy will remain.

With the ongoing U.S. baby formula supply shortage handing wide-moat Reckitt a one-time windfall, we lift our fair value estimate by 8% to GBX 6,700. Stronger performance of the consumer health segment in early 2022 than we’d previously credited and the recent strength of the U.S. dollar also contribute to the upgraded valuation. Dramatic shortages in U.S. infant formula in recent months--following disruption of supply from narrow-moat Abbott--have led to Reckitt markedly ramping-up Stateside production, as well as securing a temporary permit from the Food and Drug Administration (FDA) for the importation of baby formula into the United States. Investors cheered Reckitt’s strong first-half result, driving the stock price decidedly higher. Nonetheless, we view the wide-moat stock as fairly valued relative to our upwardly revised fair value estimate.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition--a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses--positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic--further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition--a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses--positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic--further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.