Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at Reckitt Benckiser Group (LSE: RB) (NASDAQOTH: RBGLY.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.
Emerging markets still punching
Reckitt Benckiser continues to post solid revenue growth across the globe — like-for-like sales rose 5% to £2.55bn during July-September — helped by the strength of its ‘Powerbrands’ like Nurofen, Cillit Bang and Finish. In particular, these labels continue to pull up trees in emerging markets, and group sales in Latin America, Asia Pacific, Australasia and China rose 13% during the period, at constant currencies, and 5% in Russia, the Middle East and Africa.
I have made no secret my belief that companies with huge exposure to developing regions, particularly those in Asia, should enjoy the long-term fruits of rapidly expanding populations and rising disposable income levels.
Suboxone revenues remain a worry
However, big worries remain over the revenues outlook for the firm’s blockbuster Suboxone product, whose tablet and film variations help to combat drug addiction. Reckitt Benckiser has lost patent protection on this product, which generates sales of around $1.5bn, leading to a gaggle of new entrants in the market.
Generic alternative Subutex has already eaten into Reckitt Benckiser’s market share, while pharmaceutical firm Orexohas also launched its Zubsolv product in recent months.
Consumer Health expansion to push growth
However, the company advised last month its intention to expand its rapidly-growing Consumer Health division organically and through M&A action. Liberum Capital points out that growth here is currently running at between 4%-6% a year, versus 3-5% growth in Hygiene and 1-2% for its Homearm.
Reckitt Benckiser — whose Consumer Health labels include the likes of Durex condoms and Strepsils throat lozenges — currently operates in around 70% of all sub-categories within this £84bn market. This leaves the firm with plenty of scope for further forays into this area, particularly as demand for Consumer Health items in developing regions continues to surge.
Earnings remain under the cosh
Still, City analysts expect the company to punch underwhelming earnings performance in the near term. Indeed, earnings per share is forecast to dip 1% in 2013, to 265p per share in 2013, before rebounding just 2% next year to 269p.
These projections leave Reckitt Benckiser dealing on P/E readouts of 18 and 17.7 for these years, well above the value yardstick of 10 which is generally considered decent value. Given the meagre medium-term earnings outlook, Reckitt Benckiser’s share price could be considered as overdue for a negative re-rating.
Bank on stunning gains with the Fool
In my opinion, Reckitt Benckiser is a fantastic pick for those looking for great growth prospects. Despite economic rebalancing in key emerging markets, the company continues to witness accelerating activity here. Underpinned by a hefty portfolio of market-leading brands, I believe the company is in great shape to hurdle meagre earnings prospects this year and next and deliver solid long-term growth.
