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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.
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.
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.
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.
Fair and balanced: https://seekingalpha.com/article/4680531-reckitt-benckiser-maybe-caution-is-appropriate
Has anyone read anything about next steps and timings regarding the legal proceedings?
There are over 400 cases. Also, check what happened to GSK in the US with Zantac.....no wonder investors are worried. ii estimate the risk from "0", to $2-8bn. A very wide range and both highlights the risk and uncertainty. 2 things institutional investors don't like. If the $60mn cases doesn't get overturned....expect a further almighty crash. So, why take a risk on this stock? Just sell now and buy when the case gets overturned. No brainer
In 1999. As argued here at the time, the Mead deal looked like a bad case of a chief executive trying to buy growth at a moment when the revenue line was temporarily sticky.
On the day the takeover was announced, Reckitt’s share price was £71. Now it is £45.75, the lowest since 2013. Not all the woes can be pinned on Mead – margins elsewhere have also been a problem – but its distraction factor has been immense. The soon-to-be chair Sir Jeremy Darroch, a former BSkyB boss, will have to explain to frustrated investors why Reckitt deserves to exist in current form: the brands in both the hygiene and health divisions wouldn’t struggle to find buyers.
Reckitt – who knows? – may yet escape its litigation battle with minimal or tolerable financial impact, which is how life seems to be turning out in the US for GlaxoSmithKline with its heartburn drug Zantac. But Monday’s modest 2% bounce in Reckitt’s shares reflects the new mood of heightened uncertainty. Neither moral of this tale counts as new. First, when previously successful companies engage in bet-the-farm acquisitions, shareholders should ask more questions. Second, don’t pay the chief executive £97m before his handiwork can be judged.
High risk guys - be aware
He worst acquisition by a major UK company in the last decade? It’s hard to think of a deal that beats Reckitt Benckiser’s $18bn purchase in 2017 of Mead Johnson Nutrition, a US-listed maker of baby milk formula. Shares in the Dettol-to-Durex group have never recovered from the shock. By way of add-on award, Rakesh Kapoor, Reckitt’s chief executive back in the day, can probably scoop the prize for most overpaid FTSE 100 boss of recent times: he departed two years after his fateful piece of deal-making having been paid the astonishing sum of £97.6m during his eight years in charge.
The latest example of Mead Johnson’s dreadful legacy was Friday’s news that a court in Illinois awarded $60m in damages to a woman whose premature baby died in intensive care after consuming the company’s Enfamil formula; the allegation was that Reckitt failed to warn adequately that feeding with infant formula increased the risk of necrotising enterocolitis (NEC). The verdict knocked 15%, equivalent to £5.4bn, off Reckitt’s stock market value as investors tried to guess what could follow from 400-odd similar NEC-related cases involving Mead and its US rival Abbott Laboratories.
Reckitt stands by the safety of its products and will appeal in Illinois, arguing the jury verdict was “not supported by the science or experts in the medical community”. Management spent Monday trying to reassure the City. But, as so often with US legal cases, outsiders take little for granted in the early stages. Barclays analysts think Reckitt’s appeal chances are “reasonable” and that £2bn of damages would be an “absolute worse case”. Over at Jefferies, they opted for imprecision and said the risk is anywhere between zero and £8bn-plus.
Investors are making a fortune from UK healthcare. Why is nobody holding private equity to account?
David Rowland
Read more
For the time being, then, Reckitt as an investment is a play on litigation risk. Management’s narrative about “rejuvenation” and higher profit margins from brands such as Cillit Bang and Finish has become the secondary story.
It would have been different without Mead Johnson. The 2017 deal looked overpriced at the time since Reckitt was paying about 29 times earnings, and it demonstrably became a waste of money when Kapoor’s successor announced a £5bn writedown on the carrying value only three years after purchase. That mostly related to the Chinese operation where Reckitt had to admit it overestimated birthrates and consumers’ loyalty to local brands; it sold the unit on cut-price terms a year later.
Kapoor’s mistake was to rip up Reckitt’s previous winning strategy of bolt-on purchases that could be slotted smoothly into the sales machine. Nurofen painkillers and Durex condoms arrived that way under old boss Bart Becht, who (aside from being paid megabucks himself) turned the old Reckitt & Colman into a sensational stock market performer after merger with Dutch firm Benckis
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Barclays concluded a realistic worst-case scenario was a few thousand plaintiffs settling in “the high hundreds of thousands of dollars per case”. An extreme worst-case scenario they calculated would result in £2bn of damages.
Consumer goods giant Reckitt has suffered a £7bn share price slump after it lost a US legal case claiming its baby formula contributed to the death of a premature child.
London-listed Reckitt’s share price plunged by the most in two decades and to its lowest point in more than a decade after an Illinois jury ruled Reckitt had failed to warn about the risks of necrotising enterocolitis (NEC) from its milk-based Enfamil brand products.
NEC is an illness that damages the stomach and tends to affect premature babies. Reckitt’s US subsidiary Mead Johnson Nutrition had been sued by Jasmine Watson, who claimed the baby formula caused the death of her premature baby.
FTSE 100-constituent Reckitt has now been ordered to pay Ms Watson $60m (£47m) after losing the case.
Ashley Keller, a lawyer for Ms Watson, said: “The jury’s finding confirms what Mead Johnson folks already knew – that its formula dramatically increases the NEC risk “This is the first verdict in the US, but won’t be the last, unless baby formula makers accept responsibility for their misdeeds.”
News of the decision sparked a near 20pc plunge in Reckitt’s share price, wiping around £7.3bn ($9.3bn) from its market value.
It comes amid hundreds of US lawsuits against formula makers over NEC. The Illinois case was the first to go to a jury trial.
Shares in Abbott Laboratories, another formula maker facing legal claims, fell almost 5pc. Jurors took less than two hours to decide that Mead Johnson should pay $60m in compensatory damages. Mr Keller said: “We only asked for $25m, but the jury came back with more than double that.”
More than 400 suits targeting Mead Johnson and Abbott are consolidated before a federal judge in Chicago for pre-trial information exchanges. The judge hasn’t yet scheduled a trial. Thousands of other suits are pending in state courts, Mr Keller said. Reckitt continues to insist its products are safe and not linked to NEC. It has vowed to appeal the Illinois case.
NEC has a fatality rate of as much as 40pc. It is a major cause of death among premature babies, though rarely occurs in full-term babies.
The disease, which affects intestinal tissues, can be hard to diagnose. According to the NHS, symptoms can include general signs of illness, problems feeding or vomiting, and a swollen and tender abdomen.
While it has a high fatality rate, it can be treated with intravenous feeding and antibiotics. In some cases it can require surgery.
Reckitt said in a stock market update that it stands by the safety of its products and “strongly rejects any assertion that any of our products cause NEC”.
The company added: “It is important to note that this is a single verdict in a single case and should not be extrapolated.
“This case, and others like it, exclusively involve products used under the strict supervision of neonatologists in neonatal intensive care units and provide lifesaving nutrition options for
"https://www.hl.co.uk/shares/share-research/reckitt-us-infant-formula-unit-loses-court-battle"
Reckitt, through its US subsidiary Mead Johnson, has been ordered to pay $60mn by an Illinois court in a case against its infant baby formula. Mead Johnson has said it would appeal the decision.
There are in the region of 160 further lawsuits relating to similar issues that are still pending.
Reckitt has not previously set aside any specific provisions in anticipation of losing these cases.
That is the real issue: if RKT didn't set aside any financial provisions, and you understand II avoid risk, than no wonder this is being dumped.
"Reckitt stock is down 8% today following the $60m verdict in Enfamil baby formula that caused the death of a baby in Illinois
"This verdict confirms what Mead Johnson has known for years: cow's-milk based baby formula causes NEC in preterm infants, often with fatal consequences," Ben Whiting, a lawyer for Watson, said in a statement.
Mead Johnson said in a statement that it was disappointed with the verdict and would appeal it.
Hundreds of similar cases are in progress
Mead-Johnson may well go down as one of the worst acquisition in the fmcg history
Tough news after the Q4 Miss & the accounting misrepresentation issues "
" the first trial out of hundreds of lawsuits "
So, all good saying the first lawsuit should never have been lost, but they did and hundreds more to follow.
Investors see this as a risk, and until that risk goes away, ....
"and sheep investors run for hills".
Don't forget, this is not a retail share (i.e. private investors). Mostly institutional investors....
I think it's about 2 key issues:
1) the fear that more similar lawsuits could happen
and cost them a whole lot more
2) underlying business performance hasn't been what shareholders have been used to in the past (the Bart Becht days)
Maybe, but still don't get the investment case here.
They operate in very competitive markets with branded players with deep pockets to invest heavily in marketing spend. What do they have to offer to win there? Their prices are quite low, gross margins are too low aan their marketing spend (way too) small. Meanwhile rest of OPEX is quite high still.
I can't see this go well without a massive shift in strategy
It's simple: it costs money to market a product, whether you do that here in the UK or abroad. The revenues they can logically expect from sales in Europe will be far less than the costs required to do so.
You know for a fact they will do a raise soon. I am surprised this is even questioned. It's just a matter of when, not if.
I hope it for all Sh's but why would they: each £ they invest will generate a return for them. It will cost them they same investment to push a brand that generates £1million of sales as it does for a brand than generates £1k of sales. Where do you think they will invest?