The share price of consumer goods firm Reckitt Benckiser Group (LSE: RB) fell by 6% in early trade on Friday morning.
The company, which owns brands including Durex, Nurofen and Dettol, said that like-for-like sales rose by 2% during the first quarter, slightly below analysts’ forecasts for a 2.6% rise.
The Hygiene Home division performed best, with sales rising by 4% to £1,195m. The Health division was weaker, but still managed to deliver proforma growth of 3% thanks to a 6% increase from Mead Johnson — the infant formula company which Reckitt acquired last year for $17.9bn.
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Sales to developing markets remained strong, rising by 5%. These markets now account for 40% of revenue, highlighting the group’s geographic diversity.
What went wrong?
The main drag on sales appears to have been the Scholl footwear business, which knocked 2% off LFL sales in the health division. Management said that performance is now stabilising, but at levels “significantly below” last year.
This is disappointing, but I don’t see it as a major concern. I’m confident the firm will get on top of this situation in due course.
What’s more important to me is that Reckitt has maintained the 2% LFL sales growth seen in the final quarter of last year. This suggests that the firm’s forecast for full-year like-for-like growth of 2%-3% is reasonable, if not guaranteed.
A bargain after 30% fall?
Shares in the Slough-based group have now fallen by more than 30% since peaking at £80 in June last year.
One reason for this is that the group’s net debt rose from £1.6bn to £10.7bn following last year’s Mead Johnson acquisition. That’s quite high, but I expect it to be manageable, given that the company generated £2.1bn of free cash flow last year.
The second reason for the falling share price is that brokers’ 2018 earnings forecasts have fallen by 14% since June last year.
These factors probably justify Reckitt’s lower share price. But the group remains highly profitable and its operating margin remained stable at 23.8% in its latest year.
I think what’s happening is that this large business is going through a period of transition. As such, now might be a good time for investors to consider topping up or building a new position.
Why I’d buy
My main concern ahead of today’s figures was that chief executive Rakesh Kapoor might be tempted into another ambitious acquisition. However, Mr Kapoor recently backed out of an auction to buy parts of Pfizer‘s consumer health business and said on Friday that his priority was “organic growth”.
I’m reassured by this. The company is still digesting the Mead Johnson deal but expects to deliver a further $275m of cost savings when integration is complete. In the meantime, analysts expect the firm to deliver earnings per share growth of 2.6% in 2018, rising to 7.9% in 2019.
Although the shares aren’t obviously cheap on 17 times forecast earnings, the forecast dividend yield of 2.9% should be well supported by free cash flow. I believe that now could be a good time to buy Reckitt for a long-term buy-and-hold portfolio.
