When a FTSE 100 stock starts trading close to its 52-week low, things can get interesting. Typically, this sort of situation arises when a company lands itself in some hot water. And that certainly seems to be the case for Reckitt Benckiser (LSE:RKT).
Until recently, the consumer staples business seemed to be chugging along just fine. But following the release of its full-year result for 2023, shares ended up tumbling off a cliff. And the situation only got worse a few weeks later following the outcome of a legal battle that may have just opened the firm to potentially £2bn in liabilities.
What happened? And should investors steer clear? Or use this volatility as a buying opportunity?
The collapsing Reckitt share price
As one of the largest consumer staple companies in the UK, Reckitt Benckiser owns a vast portfolio of household brands. Some of the most popular are Durex, CillitBang, Strepsils, and, until recent headlines, Enfamil. I’ll get to the latter in a moment. But let’s start with the financials.
Despite owning brands found in almost every household, the group’s pricing power appears to have reached its limit with consumers. Further price hikes were supposed to help bolster sales and earnings in 2023. Instead, they seem to have made the situation worse, with product volumes across all categories tumbling as shoppers turn to cheap alternatives.
It wasn’t all bad news as free cash flow generation enjoyed a solid 11% jump to £2.26bn. But overall, both revenue and earnings came in lower than expected. And with investors already holding the business on a short leash, the stock tumbled 12%.
Then came the verdict from a US jury that the firm’s Enfamil baby formula led to the death of a premature infant. Management vehemently rejects the outcome, stating that the outcome was “not supported by the science or experts in the medical community”. As such, it intends to overturn this judgement through appeal. But analysts from Barclays have already started adding up the potential costs.
With thousands of potential plaintiffs likely to start making legal claims against the business, up to £2bn in damages could be heading in Reckitt’s direction. And subsequently, the stock took another double-digit nose dive.
Are investors overreacting?
A proven strategy for building wealth on the stock market is to buy when there’s blood in the streets. And that certainly seems to be an apt description for the situation this FTSE 100 enterprise has found itself in. So is this a buying opportunity?
It’s worth pointing out that the findings from Barclays were an extreme worst-case scenario. If management’s correct about its statement regarding the lack of scientific accuracy, an appeal may be successful. And this would quickly put a stop to the majority of other potential legal cases against the firm.
Having said that, the reputational damage of Enfamil certainly doesn’t help the situation. Needless to say, consumers aren’t likely to be using this again any time soon.
As for the rest of the core business, the continued recovery of the macroeconomic environment will likely help improve performance throughout 2024 and beyond. At least, that’s what analyst forecasts were predicting before the verdict was announced.
Personally, I’m sticking to the sidelines for now. Until the outcome of the appeal and any subsequent potential lawsuits against the firm are settled, I remain untempted to start buying even at today’s prices. After all, I invest in businesses, not lawyers.
The post Should I rush to buy this FTSE 100 giant currently near its 52-week low? appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and 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.
