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Shares of consumer goods firm Reckitt Benckiser (LSE: RB) have dropped a full 18% year-to-date, leaving it valued at only 16.7 times forward earnings. For a business that offers a 2.9% dividend yield and is as diversified and defensive as they come, I think this valuation proves a tempting entry point for long-term investors.

The are two main reasons Reckitt Benckiser’s shares have performed significantly worse than the FTSE 100 year-to-date. The first was a weak 2017 in which organic revenue growth was nil following a cyberattack that severely disrupted supply chain operations, and troubles in a few markets. The second issue was the company’s $18bn acquisition of infant formula maker Mead Johnson, which left some investors scratching their heads. 

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However, I believe these issues can be worked through over the medium term by Reckitt’s highly successful management team. In fact, Q4 results show the group is already returning to positive organic growth with like-for-like sales up a respectable, if not noteworthy, 2%. There’s room to build on this trend as the company focuses on higher-growth personal care items and invests in expanding its brands’ market share in high-growth developing countries.

And the Mead Johnson deal, while executed at a high price, is already paying off. Reckitt’s laser-like focus on costs has already led management to increase projected annual cost savings from $250m to $300m, leading the acquired firm’s margins significantly higher within the first months of ownership. On top of this, management has pushed the division back into positive sales momentum with Q4 sales up 3%.

With a series of market-leading brands across an array of developed and developing countries, impressive operating margins of 27.1%, and a steadily increasing dividend, I think Reckitt Benckiser’s current valuation is mightily attractive for conservative investors seeking non-cyclical sales growth and high shareholder returns.

A rare bargain?

Meanwhile, from the dizzying heights of above £58 just a few years ago, shares of rare drugs maker Shire (LSE: SHP) have shrunk in value down to just over £32 per share today. This means the company is now valued at under nine times forward earnings.

This dramatic share price contraction isn’t down to poor results, because Shire continues to post impressive sales and profit growth. But rather it was a much-ballyhooed takeover bid collapsing under political scrutiny, Shire itself taking on a massive amount of debt for its own multibillion-dollar acquisition two years ago, and then a downward revision to medium-term growth targets.

However, I think it is now attractively priced given these risks and offers long-term investors an attractive entry point to a stock that has unbelievable pricing power due to focusing on orphan drugs, high and rising cash flow that’s already reducing debt to sustainable levels, and the ability to immediately realise significant shareholder returns by spinning off its highly profitable, but generic-threatened, neuroscience division.

And despite investor negativity, this positive thesis is already largely playing out with pro forma revenue growing 8% to $15.5bn last year, net cash from operations jumping 60% to $4.3bn and year-end net debt falling to 2.9 times EBITDA, from 3.5 times at the end of Q2. With an enviable stable of rare disease treatments and a fast-improving financial situation, Shire is one dirt-cheap stock I’d love to own for the long-term.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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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