It is no secret that I like consumable company stocks, especially if the business has a stellar product range like Unilever, with items that are sold with high margins and are frequently purchased. With low-value products, people are less inclined to cut back on spending for a smaller purchase.
A consumable-type company of this kind will usually be quite defensive in nature and will often have a wide moat — brand loyalty — that tends to keep competitors at bay. You can never underestimate brand loyalty for frequently purchased items. I suspect everyone has a couple of products they wouldn’t substitute for unbranded supermarket own-goods. With this in mind, let’s take a look at Reckitt Benckiser (LSE: RB).
Reckitt Benckiser has two arms of its portfolio — Hygiene Home and Health — which with the company’s plan for RB 2.0, will be two independent businesses. Its product range across both sections includes household names such as Gaviscon, Veet, Durex, Nurofen, Dettol and Harpic. With such a strong portfolio, I’m sure you would expect the stock to be trading at a high valuation. You’d be correct in thinking this. The stock is trading at a price-to-earnings ratio of approximately 18.
Fair price for a wonderful company?
To me, the market seems to be valued highly at the moment. Therefore Reckitt Benckiser’s valuation seems neither magnificently cheap nor expensive. By contrast, Unilever is trading at a price-to-earnings ratio of 23. In the current conditions, to quote Warren Buffett, I would be happy to pay a fair price for a wonderful company. Does Reckitt Benckiser tick this box?
Reckitt posted flat like-for-like sales in its half-yearly results, disappointing the market, reducing its share price by 4% since the announcement was made. Despite this, the group announced a 4% increase in its interim dividend.
Over the previous five years, revenue and profit has continued to steadily increase. The company has a brilliant opportunity to grow its brand in China, with the acquisition of Mead Johnson, an infant milk formula manufacturer. However, due to the declining birth rates in China coupled with increasing competition, this has yet to pay off as much as investors would like. I believe a lot of Reckitt Benckiser’s success will be determined by the outcome of how Mead Johnson performs in the Chinese market in the future.
Looking forward
With new chief executive Laxman Narasimha at the helm since the beginning of September, we can expect some changes in the long term. My colleague believes that a full split between the two arms could be on the cards. I’m inclined to agree with them, and any such split could see a surge in the share price.
I think the company’s future in the event of the UK leaving the EU without a deal would be OK. With Reckitt Benckiser’s global presence, I believe the company is well-positioned for any Brexit scenario.
The company is sure to undergo some changes in the future. If some of these changes go ahead as predicated, I think value could be added for shareholders.
