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Should I buy Reckitt shares after yesterday’s 8% fall?

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Reckitt (LSE: RKT) shares plunged more than 8% yesterday. It’s a pretty steep fall following the release of its interim results. Judging by the market reaction, investors weren’t pleased.

I first covered the stock in December and wasn’t a buyer then. And I still wouldn’t buy now. Reckitt shares are down 15% since the beginning of 2021 and have fallen over 25% during the past 12 months. Here’s why I’m steering clear.

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The numbers

It wasn’t a great release from the FTSE 100 company. In a nutshell, it reported lower revenue and a loss for the six-month period.

Net revenue for the half-year declined by 4.5% to £6.6bn. But it was the sale of IFCN China, its baby formula business, that contributed to the fall. So excluding this division, net sales were only down 2.7% in the half-year and actually increased by 3.6% on a constant currency basis.

But all this didn’t detract from the fact that it delivered a GAAP operating loss of £1.8bn. It’s one thing to suffer at the top-line level, but for profits to be hit too is a double whammy. It’s no wonder Reckitt shares were hit so badly yesterday.

Exits

Investors were obviously disappointed with the results and the exit of IFCN China has proven costly. In fact, the company took almost a £3bn loss on the IFCN disposal against fair value. It also suffered an additional £165m loss from the sale of its Scholl business.

To me, this shows that these investments added another negative to the bad numbers. But this month Reckitt completed the purchase of Biofreeze for just over £700m. It said the reason for the acquisition is to allow the firm the gain entry in the fast-growing topical pain treatment category.

The consumer goods giant said it sees “exciting potential for geographic expansion and innovation” in Biofreeze. I take this with a pinch of salt. Judging by its performance, its recent exits have cost the firm money. So I’ll wait and see whether this acquisition will be successful.

Outlook

The outlook doesn’t look too rosy. It warned that cost inflation crept up in the second quarter and that “it will take time to offset this headwind with productivity and pricing actions being implemented in the back half of the year and early next year”.

Of course this will impact profitability and it has also lowered its margin guidance. And if that wasn’t enough, Reckitt Benckiser expects its next quarter to be slower when compared to the strong performance in the previous year. I guess it’s warning the market not to expect much growth when it next reports.

Bright side

Despite all the doom and gloom, it’s not all bad. Reckitt is still seen as stock that held up well during the pandemic and it’s considered by some as a core portfolio constituent.

The company also said that it’s seeing positive trends in its cold and flu portfolio, which should help its performance in the fourth quarter.

But given that the company is facing challenging conditions, I wouldn’t buy just yet. In fact, I’ve placed the stock on my watch list.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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