Reckitt men bagged a bargain amid concerns a Covid vaccine would hit demand for its hygiene products.
On Wednesday, CEO Laxman Narasimhan bought £500,000 worth of Reckitt shares, two days after his chairman Chris Sinclair spent £250,000 on increasing his personal holding.
Their purchases at respective prices of 6,329p and 6,719p contrast with Reckitt shares that had been trading at 8,000p in July and more than 7,100p just prior to Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) announcing that their Covid-19 vaccine candidate is more than 90% effective.
While the FTSE 100 index has risen 13% in November amid the rotation into value stocks, Reckitt shares have been dumped by investors on fears that the pandemic's extraordinary boost for sales of Dettol, Lysol and other products will soon be over.
- Shares for the future: the latest list revealed
- UK shares: tips on how to find bargains and avoid value traps
- Read more from Insider here
The extent of the sales surge was revealed in an October trading update showing quarterly like-for-like sales growth of 13.3%, including a 19.5% jump for the hygiene division.
Despite Reckitt upgrading its full-year revenues guidance, Jefferies has downgraded the stock to “underperform” and slashed its price target to 5,845p from 7,100p.
As well as the potential impact of vaccines in 2021, the broker is concerned the current cold and flu season will be one of the weakest on record in the United States as Covid-19 lockdown measures suppress the transmission of germs.
The high margin category has been a key driver of Reckitt's performance ever since it bought Mucinex in the United States in 2008. Jefferies analyst Martin Deboo believes the market is under-estimating a weak cold and flu season and is 7% below consensus as a result.
He said this month:
“We question whether the market has really confronted the extent of the downside, in a category with 70-80% gross margins. The summer season in the Southern Hemisphere was non-existent, with the winter one in North America opening slowly.”
Reckitt shares are up 26% from their March low, but only marginally higher than where they were when Narasimhan took the helm in September 2019.
The former PepsiCo executive has impressed the City so far after setting out his plans in February to “rejuvenate sustainable growth” at the company.
Year-to-date cost savings of £300 million are already ahead of plan as Narasimhan looks for margins in the mid-twenties and 7-9% earnings per share growth by the mid 2020s. A £1.3 billion productivity programme will be fundamental to success as it will allow Reckitt to invest over £2 billion in growth-led initiatives.
The company’s cash-making abilities have also enabled the ongoing payment of a dividend, with a yield of 2.4% some solace to income-starved investors this year. The hope is that changing attitudes towards health and hygiene will also become entrenched following the pandemic.
While the market consensus remains a ‘buy’, the vaccine breakthrough is not the only reason for a recent wobble in shares. Some analysts are also concerned that European food and household goods firms such as Reckitt are at risk of higher US taxes following Joe Biden's election victory.
Narasimhan's acquisition of 8,000 shares last week is part of his requirement to build a shareholding of 200,000 shares within eight years of his appointment. The purchase of Reckitt shares by Sinclair, who is the former chairman and CEO of Mattel, is his biggest since joining the company's board in 2015.
On Thursday, the new boss of Amigo Holdings (LSE:AMGO) bought £47,000 worth of shares in the embattled sub-prime lender.
The purchases by Gary Jennison and his wife were made shortly after results for the six months to 30 September revealed losses of £62.6 million alongside a warning regarding “material uncertainty” over the company's future.
Amigo lends to people on the understanding that a friend or relative will make the repayments if they fail to do so. But it spent the half year working through a backlog of more than 25,000 complaints after the Financial Conduct Authority ruled that Amigo had failed to properly evaluate whether customers could afford the loans they were taking out.
A temporary pause in new lending except to key workers and the impact of Covid-19-related payment holidays to 57,000 customers meant revenues slid to 36.5% to £92.3 million.
Jennison hopes to resume lending next year, but the turnaround has been frustrated by the “poor behaviour” of some claims management companies, with more than 300 staff currently employed to deal with compensation cases.
- Bill Ackman's top share tip for 2021
- Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)
After Jennison's share purchases were confirmed to the market on Friday at a price of 9.5p, shares spiked above 10p before closing 6% higher at 9.85p. New non-executive directors Maria Darby-Walker and Michael Bartholomeusz also bought shares at the same time.
Jennison, who joined the board as a non-executive in August and is now CEO, told shareholders in a letter recently: “I have successfully turned around three financial services businesses in my career, and I am determined to make this number four.”
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.