The Reckitt Benckiser (LSE:RKT) share price is up 0.8% today after mixed first-half earnings results caused some volatility. It briefly spiked to £45.80 before retracing back towards yesterday’s level of around £44.
The fast-moving consumer goods (FMCG) company has had a tough year, marred by reporting issues, lawsuits, and a tornado. It’s down 20% since the new year, dragging out an eight-year-long decline that has seen the price almost halve in value.
Way back in June 2017, it hit an all-time high of £80 following a 20-year-long rally that saw the price grow 780%.
So are the good times over or can this mega-cap FCMG relive the glory days?
Major shakeup
This year’s string of bad luck seems to have ignited a fire under the seats of those in charge. Along with today’s report, Reckitt announced a major overhaul to the business.
It now plans to sell its £1.9bn home care portfolio and shift focus entirely to its health and hygiene product range. The home care range includes popular household names like Air Wick, Cillit Bang, and Mortein. Despite their popularity, the company deems them as “no longer core“, as opposed to other brands that “offer the best long-term opportunity for growth“.
It noted Strepsils, Nurofen, and Durex as more profitable brands.
Lack of nutrition
In addition to dropping home care, it’ll also offload its troubled Mead Johnson Nutrition business, which markets Enfamil and Nutramigen.
The share price tumbled earlier this year after Enfamil was blamed for the death of an infant in the US. A warehouse that manufactures and stores the product was later hit by a tornado, interrupting the supply chain.
Since the nutrition business only accounts for 15% of revenue, shareholders have been pressuring the group to sell it. The asset manager Flossbach von Storch, which owns 4.2% of Reckitt, feels nutrition doesn’t “really have a strong strategic fit“. The sentiment is echoed by another top 10 shareholder, Causeway Capital, saying it “doesn’t fit into their future”.
However, the business may be difficult to sell. Analysts estimate the total liability from the Enfamil litigation could reach as much as £8bn.
Forecast downgrade
Revenue was flat in Wednesday’s report and operating profit was down 4.9% to £1.7bn. Like-for-like net sales grew 0.8% but still missed analysts expectations. Much of the losses have been attributed to the tornado, although the company believes its comprehensive insurance will make up most of the £150m in lost revenue.
Based on the results, the group has lowered its full-year sales growth forecast for 2024 by 1%.
Despite the downgrade, today’s announcement was well received. Shareholders seem to be in agreement with the reorganisation efforts, feeling it’s a step in the right direction. The price has increased 8% since hitting a yearly low of £41.10 in April this year.
A slow recovery
For shareholders like me, it may be some time before we see profit again. The average 12-month price target of analysts evaluating the stock is around £53 — a 20% increase.
Prior to this year, the last time it traded that low was early 2015.
Although now looks like a good opportunity, I think the risk from the nutrition business is too high. If it manages to offload that efficiently, then I’ll consider buying more shares.
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Mark Hartley has positions in Reckitt Benckiser Group Plc. The Motley Fool UK has recommended Reckitt Benckiser Group Plc. 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.
