A jury in the US has ruled against Abbott Laboratories in a case concerning premature infant formulas. As a result, the Reckitt (LSE:RKT) share price is down 8%.
The FTSE 100 company has a similar problem of its own. But with the stock now 33% lower than it was five years ago, could this be the time to buy the stock ahead of a potential recovery?
Infant formula
Reckitt paid $17bn to acquire infant formula subsidiary Mead Johnson in 2017. And the division has been nothing but trouble for the FTSE 100 company since.
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The business is now trying to dispose of the unit, but it’s unlikely to get anything like that back. Aside from the fact it overpaid for the deal in the first place, there’s now a big legal issue.
In March, a US court ruled in favour of a mother whose premature baby died after consuming a Reckitt product. That cost the firm $60m, but the question now is whether there’s more to come.
The latest ruling against Abbott Labs suggests there might be. And this means the company is likely to get even less for the baby milk subsidiary it’s trying to sell.
The bigger picture
Selling off the infant formula division is only one part of a broader restructuring plan for Reckitt. The company has a broad portfolio of brands, some of which are stronger than others.
The trouble with this is the weaker divisions weigh on the growth of the firm as a whole. So the plan is to focus on the strongest lines, divest the others, and use the cash for share buybacks.
Unilever has been working on a similar plan since the start of the year. I think this has been a success so far and I can see how there might be a similar opportunity for Reckitt.
If the company can execute this plan successfully, shareholders could be in a good position once everything settles down. That could take a while, but I think there’s clear potential here.
Brand power
Sometimes the power of a brand can be hard to quantify. But not with Reckitt – the strength of its names shows up in the company’s gross margin.
Reckitt vs. Unilever gross margins 2014-23
Created at TradingView
Over the last 10 years, the firm has consistently maintained gross margins in excess of 57%. That’s far higher than Unilever, whose best year resulted in just under 45% margins.
In fact, Reckitt stacks up pretty well against some of the best businesses in the world. Its margins over the last decade resemble those at Google’s parent company, Alphabet.
Reckitt vs. Alphabet gross margins 2014-23
Created at TradingView
That’s a sign there’s something really outstanding about the firm’s brand portfolio. It’s able to charge a significant markup on the products it makes because of the power behind the names.
Should investors buy, sell, or hold Reckitt shares?
I think Reckitt has a good business and this will emerge sooner or later. The question in the short term is whether the stock has further to fall before it does.
The stock market doesn’t like uncertainty and the company has a lot of that at the moment. But investors with a long-term outlook might well want to consider buying the shares right now.
