Stocks like Rolls-Royce and International Consolidated Airlines are often among the daily FTSE 100 losers. But I don’t expect to see Reckitt (LSE: RKT) as one of the Footsie’s bigger faller. That, though, is exactly what happened Tuesday.
Reckitt shares ended Tuesday down a whopping 8.4%, more than twice as big as any other FTSE 100 drop on the day. So what was behind it? In part, it’s a perhaps predictable fallout from our Covid-19 progress.
Reporting interim figures, Reckitt revealed a slowdown in cleaning and disinfecting products. Or, to quote the words of chief executive Laxman Narasimhan, approximately 30% of revenue was from “disinfection brands, which are structurally rebasing.”
When a company enjoys a surge in demand for this class of products during a pandemic, there’ll inevitably be a decline when the need for obsessive cleanliness starts to ease.
However, that’s not the whole underlying cause of an 8.2% drop in Q2 revenue. The spectre of rising inflation is taking its toll too. The company pointed to the rising costs of raw materials to explain its falling margins.
Reckitt’s operating profit margin declined 2.9 percentage points to 21.6%. Inflationary rises will take time to work through to customer pricing but, in the meantime, it puts pressure on the bottom line.
Reversal of fortunes
If the Reckitt share price is underperforming the FTSE 100 today, it was certainly outperforming it last year. The wider stock market crashed to a painful low in March 2020. But after a modest dip, Reckitt shares soared to a peak by July.
It was all part of a flight to safety. Investors piled into stocks thought resilient in the face of the pandemic. And, in this case, the stock gained extra momentum from the demand for products to address those growing hygiene and cleanliness requirements.
So, on to my big question. What would I do now? Back during the crash, I thought it was clearly a mistake to buy shares that had been elevated by panic — and I said so at the time. Those selling falling shares around the market bottom made a very similar mistake, following the short-term crowds.
FTSE 100 stock revaluation
It brings to mind that famous quote from leading economist and investor Benjamin Graham: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” A year ago, share values were determined by voters. And the votes were driven by short-term reaction, fear and panic.
Now that’s drawing to an end, the long-term weighing machine is kicking back in. And it’s weighing share values against the genuine long-term outlook for the companies themselves.
Saying that, I do think the market’s take on Reckitt has overshot a little in the downwards direction. There’s still risk there, with the company expecting Q3 to be “slower due to strong prior year comparators.”
But I’m seeing an attractive long-term FTSE 100 stock here. It’s on my list of buy candidates for August and beyond.
