Health, hygiene and home products powerhouse Reckitt Benckiser (RB.) advanced 1.7% to £44.37 after its full-year results beat market forecasts. While the FTSE 100 firm's well-received figures were boosted by a strong flu season towards the end of the year, some analysts now warn that its lofty valuation ignores near-term risks.
Under chief executive officer Rakesh Kapoor, Reckitt is intensifying its focus on high growth, high margin 'Powerbrands' ranging from Nurofen to Dettol, Durex, Cillit Bang and Strepsils, while redeploying resources to faster-growing emerging economies. Investors have responded positively to this strategy, with the shares rallying 30% from £34 since July 2012.
In light of this run, some analysts are wary about a valuation that now leaves little room for disappointments. With a £39.75 price target, broker Panmure Gordon & Co argues the company doesn't 'warrant an FMCG (fast moving consumer goods) rating', as 21% of Reckitt's earnings come from a pharma business facing threats from generic competition.
Canaccord Genuity, which has raised its price target to £34.25p this morning, concedes the 2012 numbers are strong yet the investment bank is sticking with its 'Sell' recommendation on valuation grounds. 'On traditional multiples Reckitt is not particularly expensive prima facie', writes the broker, 'but it is appropriate to put the Pharma business on a very low multiple to reflect the possibility of generics eroding that business. In doing this, Reckitt's valuation looks fuller and towards the top of the HPC (household product companies) group.'
Slough-headquartered Reckitt reported sales up 1% to £9.567 million for the year to December 2012. Operating profits rose 3% higher to a better-than-expected £2.6 billion, as margins benefited from pricing initiatives and savings from a cost cutting drive.
Earnings per share rose 7% to 264.4p, comfortably ahead of the 249.3p consensus, while Reckitt also pleased with a chunky 11% dividend increase in the final dividend to 78p, taking the year's total payout up 7% to 134p.
Investors also responded positively to evidence of growing sales momentum throughout the year, with Reckitt flagging better-than-expected 7% growth in fourth quarter like-for-like sales to £2.5 billion. This represented the strongest quarterly performance of the year as Reckitt benefited from a 'good' cold and flu season towards the end of the year, supporting stronger growth in the challenging markets of Europe and North America and with momentum flowing into 2013.
Driving the numbers were strong performances from health and hygiene 'Powerbrands' brands such as Durex and Gaviscon, as well as Dettol, Finish and Harpic. While sales growth in Europe and North America was ahead of expectations, it was emerging markets, which now represent 44% of sales, which underpinned performance.
Also pleasing was the 19% sales growth delivered by Reckitt's Pharma division through the fourth quarter, although the accelerated transfer of tablet sales to lower priced Suboxone film - in a move to make the business more defensible against a generic threat to the opioid painkiller - continued to crimp margins.
Copiously cash-generative, the company has also returned to the acquisition trail of late, having beaten out Germany's Bayer to acquire Schiff Nutrition in December for $1.4 billion. This transaction took Reckitt into the $30 billion market for branded vitamins, nutrition supplements and nutrition bars and was followed by yesterday's (12 Feb) effective acquisition of some over-the-counter (OTC) pharma brands from Bristol-Myers Squibb (BMY: NYSE). Under the terms of the deal, which includes a $44 million option fee giving Reckitt the right to buy the brands outright, the consumer goods giant is paying BMS $482 million for the right to sell some of its non-prescription remedies in Brazil, Mexico and other parts of high-growth Latin America.
For 2013, Panmure Gordon is looking for earnings of 251.6p per share, while consensus currently points to earnings of 253p, although analysts are expected to raise their forecasts by 5% on the back of today's results. Based on existing forecasts, Reckitt's shares trade on a punchy prospective price/earnings (PE) ratio of 17.5 times, so any future disappointments leaves the shares vulnerable to a downward correction.
