Reckitt Benckiser Group Plc: Buy, Sell Or Hold?

What are the long-term prospects for Reckitt Benckiser Group plc (LON: RB)?

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I’m always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index.

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I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at Reckitt Benckiser

Today I’m evaluating Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US), a British multinational consumer goods company that manufactures household cleaning, and health and personal care products,which currently trades at 4,670p. Here are my thoughts:

1. Financial strength: Reckitt Benckiser is in solid financial health. Net debt/EBITDA ratio is less than 1 and interest cover is a hefty 171 times. Also, during the past 10 years, the company has converted an average of 18% of its revenue into free cash flow (FCF) and delivered over £1bn in FCF per year.

2. Profitability: Reckitt Benckiser has been one of the best-performing companies in the FTSE 100 index over the past decade. The company has grown revenue per share more than 2.5 times, operating profit per share and adjusted earnings per share more than 3.5 times, and dividend per share almost 5 times. Operating margin has consistently averaged an industry leading 23% and return on equity (ROE) has been stellar, averaging 35% per year.

3. Management: Bart Becht was the company’s CEO from 1999 to 2011. Under his tenure, the company achieved great success with its focus on marketing its core brands and excellent product innovation, value-enhancing acquisitions, and improved supply chain efficiency. His replacement, Rakesh Kapoor, has been with the company since 1987 serving various roles.     

4. Long-term prospects: Reckitt Benckiser is the world leading maker of household cleaning products and also owns a strong portfolio of brands in health and personal care. Its core products — which the company refers to as ‘Powerbrands’ — include household names like Durex, Strepsils, Dettol, Woolite and Clearasil.

Recently, the company laid out plans on focusing more on high growth and high margin product categories and regions. These include concentrating its efforts and capital spending on its health and hygiene business and into developing markets. The company is targeting to grow the proportion of revenue derived from health and hygiene products and faster growing regions to 50% and 72% of group revenue by 2015, respectively. At the end of 2012 they represented 44% and 68% of group revenue.   

Also, late last year, the company acquired Schiff Nutrition, a leading provider of vitamins and supplements in the US. The company sees this as a platform to launch its entry into the large and growing global vitamins and supplements market.

Furthermore, the company’s pharmaceutical business continues to be highly profitable increasing its net revenue by 10% and operating profit by 3% in 2012 despite its high-selling Suboxone tablets losing patent protection in 2010. Since then, the company has successfully transitioned to Suboxone‘s film version which is patent protected until 2020.

However, the future profitability of its pharmaceutical business still remains a concern with the lingering threat of generic competition, government regulation, and healthcare reform.  

5. Valuation: Reckitt Benckiser shares are trading at a forward P/E of 17, slightly lower than its 10-year P/E average of 18, and at 30 times its 10-year average earnings. Also, it returns a dividend yield of 3%, twice covered.

My verdict on Reckitt Benckiser

If you were fortunate enough to hold on to Reckitt Benckiser shares for over a decade –you would have been rewarded with annualised returns of 17% per year. Reckitt Benckiser is one of those Buffet-type shares –companies that are well-run, have strong brands, earn great returns on capital and generate robust free cash flows. However, the problem with these kinds of companies is that they rarely trade at a discount which lowers your margin of safety.

On the other hand, you could also say Reckitt Benckiser shares were trading at the same heady valuations 10 years ago. So, it would not be unreasonable to assume that it can deliver returns close to what it achieved last decade; its fundamentals remain intact and its future looks promising.

Still, even though it is a ‘wonderful’ company, I do not think it has a wide enough economic moat that would make me comfortable buying it at these prices. Plus, there are other similar companies you could get for a lower price.           

So overall, I believe Reckitt Benckiser at 4,670p looks like a hold.

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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

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