Reckitt Benckiser cuts guidance but might have a cure

Reckitt should trade at a premium but has struggled. A restructuring and new CEO could be the remedy.  

A frustrating top-line performance by Reckitt Benckiser (LSE:RB.) served as another reminder today why shares in the consumer goods giant continue to trade at a discount to European peers.

The Nurofen, Scholl and Durex owner cut its full-year revenues guidance by one percentage point to between 2% and 3% in the wake of flat like-for-like sales in the second quarter. The City had been hoping for growth of almost 2% in the three-month period, but Reckitt said its performance had been knocked by slowing Chinese demand for baby formula and the impact of a disappointing cold and flu season for sales of its medicines.

Shares tumbled to 6,269p at the opening bell, only to recover as the session wore on to stand 2% lower at 6,543p. This continues the choppy share price performance of the past year for Reckitt, which has fluctuated between the levels of 5,500p and 7,000p.

FTSE 100-listed Reckitt boasts a portfolio of well-known brands that many consumers can't do without, which means its shares should be well placed to attract a premium status.

Source: TradingView Past performance is not a guide to future performance

The reality is that the uncertain top-line showing has offset a more resilient margin performance, with adjusted earnings per share for the half-year today still coming in slightly better than expected after growth of 4% to 145.4p.

CEO Rakesh Kapoor, who is stepping down in September after eight years in charge, is confident that the second half will see a return to more normal levels of growth. A major restructuring under which Reckitt is creating two separate business units - one for health brands and the other for hygiene and home products - is also on track to complete by the middle of next year.

While progress has been made in many areas, Kapoor admitted today that the company still has "work to do to deliver a consistent financial performance". 

That view was endorsed by analysts at UBS, who believe that longer-term uncertainty on the company's margin outlook was holding back the share price. At 18.4 times 2020 earnings, the stock currently trades at a 15% discount to its peers in the EU staples sector.

UBS added:

"We think this multiple is fair considering the risk on the sustainability of Reckitt's long-term earnings margin and the uncertainty on how quickly its top-line growth will accelerate again."

Investors will be hoping that the arrival of PepsiCo (NASDAQ:PEP) executive Laxman Narasimhan as the new CEO in September will mark an upturn in fortunes after a number of recent difficulties for the Slough-based company. These have included last year's problems at a European infant nutrition plant, which led to supply chain disruption in the key China market.

And earlier this month, Reckitt agreed to pay a total of $1.4 billion to resolve all US federal investigations into the sales and marketing of Suboxone Film by Indivior, which used to be part of Reckitt until its demerger in 2014.

UBS has a 'neutral' stance on the stock and a price target of 6,600p, while counterparts at Morgan Stanley see a buying opportunity for long-term investors based on a target of 7,300p. 

The stock currently trades with a forward yield of about 2.6%, with today's interim dividend increasing 4% to 73p a share.