Firering Strategic Minerals: From explorer to producer. Watch the video here.
London South East prides itself on its community spirit, and in order to keep the chat section problem free, we ask all members to follow these simple rules. In these rules, we refer to ourselves as "we", "us", "our". The user of the website is referred to as "you" and "your".
By posting on our share chat boards you are agreeing to the following:
The IP address of all posts is recorded to aid in enforcing these conditions. As a user you agree to any information you have entered being stored in a database. You agree that we have the right to remove, edit, move or close any topic or board at any time should we see fit. You agree that we have the right to remove any post without notice. You agree that we have the right to suspend your account without notice.
Please note some users may not behave properly and may post content that is misleading, untrue or offensive.
It is not possible for us to fully monitor all content all of the time but where we have actually received notice of any content that is potentially misleading, untrue, offensive, unlawful, infringes third party rights or is potentially in breach of these terms and conditions, then we will review such content, decide whether to remove it from this website and act accordingly.
Premium Members are members that have a premium subscription with London South East. You can subscribe here.
London South East does not endorse such members, and posts should not be construed as advice and represent the opinions of the authors, not those of London South East Ltd, or its affiliates.
Fair and balanced: https://seekingalpha.com/article/4680531-reckitt-benckiser-maybe-caution-is-appropriate
What does the article say, please? Am not subscribing.
Reckitt Benckiser reported mediocre full-year results for fiscal 2023 as well as a mediocre guidance for fiscal 2024.
Aside from the results, Mead Johnson - a subsidiary - had to pay a $60 million dollar fine and investors obviously fear more lawsuits to come.
The stock is probably undervalued but at this point, we should be rather cautious about an investment.
In November 2023 I wrote my last article about Reckitt Benckiser (OTCPK:RBGPF) and I stated my optimism for the long run. And while we can certainly argue that four to five months is not really “the long run”, the stock performed horrible since my last article.
In the last few weeks, two major news stories seemed to have a big influence on the company and also on the stock price – the reported annual results for fiscal 2023 and the litigations about the infant formula of Mead Johnson (a subsidiary of Reckitt Benckiser). I will provide an update in the following article and assess if Reckitt Benckiser is still a good long-term investment despite the recent developments. At least the stock is now 20% cheaper than at the beginning of November 2023.
Annual Results
We start by looking at the last annual results, which were reported at the end of February. And although the results were not a complete disappointment, they were not great either. Revenue increased slightly from GBP 14,453 million in fiscal 2022 to GBP 14,607 million in fiscal 2023 – resulting in 1.1% year-over-year growth. And while this is a rather low growth rate, like-for-like growth was 3.5% for fiscal 2023 with volume declining 4.3% and price/mix increasing 7.8%.
However, operating profit declined 22.1% year-over-year from GBP 3,249 million in fiscal 2022 to GBP 2,531 million in fiscal 2023. And finally, diluted earnings per share declined from 324.7 pence in the previous year to 228.7 pence in fiscal 2023 – resulting in 29.6% year-over-year decline.
While operating profit and earnings per share declined, free cash flow increased from GBP 2,031 million in the previous year to GBP 2,258 million in fiscal 2023 – resulting in 11.2% growth. And as free cash flow is one of the most important metrics for any business this is actually good news for the business. Free cash flow especially increased due to a higher conversion rate – instead of 83% in fiscal 2023 it was 97% in fiscal 2023.
We can also look at the three different segments. The problem child remains to be Nutrition – at least when looking at year-over-year growth rates. But for the nutrition segment we still have to keep in mind the supply issue in 2022, which was a huge tailwind for Reckitt Benckiser. During the earnings call, management commented:
In Nutrition, we see a combination of the rebasing in U.S. and North American volumes following the competitor supply issue in 2022 and some market volume weakness in developing markets and I am going to go into that in a little bit more detail in a few more charts.
Cont'd:
For the full year of fiscal 2023, Nutrition generated GBP 2,410 million in revenue – a like-for-like decline of 4.0% for the full year. But when comparing the fiscal 2023 result to fiscal 2021, we see 18.0% volume growth – a solid growth rate and fiscal 2022 must be seen as positive outlier. We also must point out that North America is performing great – when comparing to fiscal 2021 – while the emerging markets are struggling.
The other two segments however could report low-to-mid single digit growth rates. And at least when looking at revenue, these two segments are the most important for Reckitt Benckiser with each segment being responsible for more than 40% of total revenue. Hygiene generated GBP 6,135 million in sales in fiscal 2023 and reported 5.1% like-for-like growth and Health grew 5.0% like-for-like and generated GBP 6,032 million in revenue.
And the outlook for fiscal 2024 is similar to fiscal 2023 – not great but also not a huge disappointment. Revenue is expected to grow between 2% and 4% on a like-for-like basis. And while Health and Hygiene are expected to grow in the mid-single digits, the Nutrition business is expected to decline in the mid-single digits once again. However, adjusted operating profit is expected to grow with a higher pace than revenue.
Results and outlook were not perfect, but it was enough to tank the stock in the double digits. And the second major drop came in mid-March after news about the Mead Johnson litigations were announced.
Mead Johnson Litigation
Following earnings, the stock declined more than 13% and mid-March the stock was sent down another 14.6%. This time the reason were not quarterly or annual results, but news about an Illinois jury having ordered Mead Johnson – a subsidiary of Reckitt Benckiser – to pay $60 million to the mother of a premature baby who died after being fed the Enfamil baby formula produced by Mead Johnson.
And in my opinion, it is a huge problem that Reckitt Benckiser can tell investors that many cases had been filed against the company, but management is not able at this point to state a precise number of cases related to the safety and marketing of the Enfamil baby formula.
It seems like over 400 cases had been filed with the Chicago federal court, but there might also be cases involved that were filed against Abbott Laboratories (ABT) – the other major producer of baby formula for premature infants, which is also based in the Chicago area. And not surprisingly, Reckitt Benckiser is strongly disagreeing with this verdict and will try to fight it. Management is also expecting that some of the additional filed cases will be dismissed in a preliminary stage. Nevertheless, it takes only a few cases with a similar verdict (to pay $60 billion) to generate a huge financial damage to the company.
Cont'd:
The stock market is certainly not always rational, but as reaction to the news the market capitalization of Reckitt Benckiser dropped more than $6 billion hinting that investors are fearing a huge damage for the business.
At this point, companies like Bayer (OTCPK:BAYZF) or 3M Company (MMM) come to mind. Both are cautionary examples for businesses really struggling due to legal matters and in both cases the stocks continued to decline further and further and there is still no end in sight. If this is the path Reckitt Benckiser is going down, it probably would be best to get out of the stock right now.
Technical Picture
And it seems like Reckitt Benckiser is facing another problem – its own chart. Following the annual results and the litigation news, the stock declined to a 11-year low. And in the process of declining during the last few weeks, the stock broke through several strong support levels – probably explaining why the stock is declining so steep. For starters, the stock broke through several lows from the years 2018 till 2023, which were a strong support level until recently. Additionally, the stock broke through a long-time trendline that has been in place since 2000 and it also broke through the 200-month moving average.
At this point, after breaking through several support levels, it doesn’t look good, and we certainly must take into account the risk of even lower stock prices. The only glimmer of hope right now is the fact that we are trading at the October 2013 low (but this is not really strong support level). Aside from this low, we are currently at the 50% Fibonacci retracement when connecting the low directly following the IPO and the highs of 2017 and that could be a stronger support level.
But at this point I would not bet on Reckitt Benckiser already having found its bottom and the risk of further declining stock prices seems to be high at this point.
Intrinsic Value Calculation
But while the chart is not really a supporting factor for Reckitt Benckiser right now, we can argue that the stock seems to be really cheap at this point. When using the free cash flow of fiscal 2023 (GBP 2,258 million) and a 10% discount rate as well as 718.5 million outstanding shares, the company has to grow slightly below 3% annually in order to be fairly valued.
At this point, I would argue that Reckitt Benckiser should be able to grow about 3% annually till perpetuity. At least for fiscal 2024, management is expecting growth rates for operating profit that might exceed 3% growth. Hence, we can make the case that Reckitt Benckiser is at least fairly valued right now. And in theory I would assume Reckitt Benckiser being able to grow with a higher pace, but considering the results, the outlook and the lawsuits it might be better to stay on the side of caution.
Conclusion
I remain confident that Reckitt Benckiser is a good investment over the long term. However, there are two issues we should not ignore – the technical picture on the one side and the litigations on the other side. Especially the lawsuits are a huge risk that is very difficult to assess.
To reflect my caution at this point, I will downgrade the stock to a “Hold” – and that is what I will do with my own shares: I will hold on to them as I still believe over the long run Reckitt Benckiser will be a solid investment but I would not purchase any additional shares at this point.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.