Reckitt Benckiser (RB.L) – Is now the time to buy?
Reckitt Benckiser Group plc has had it's fair share of problems this year. In already challenging market conditions, the company has had to deal with issues in South Korea and a huge amount of pessimism around it's recent purchase of Mead Johnson. This has driven the price of the stock close to it's 52 week low. Do these events create an opportunity to buy Reckitt Benckiser at a good price? Do we even want to invest in Reckitt Benckiser?
Who is Reckitt Benckiser?
Reckitt Benckiser is a British multinational consumer goods company that produces health, hygiene and home products. RB's brands include Dettol, Strepsils, Veet, Airborne, Air Wick, Calgon, Clearasil, Cillit Bang, Durex, Lysol, Mycil and Vanish. With so many well-known brands under its umbrella, Reckitt Benckiser make products that run out fast and have real brand appeal. A true consumer monopoly.
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Reckitt Benckiser's debt position
Like most consumer monopolies, Reckitt Benckiser has very little debt. Reckitt Benckiser's total debt is equivalent to only 2 years of it's current profits. It's borrowings are only 9% of total shareholder capital. This company is a real cash cow and we are extremely confident that the firm can payback outstanding debts easily.
Reckitt Benckiser's growth
With a growth quality of 85%, revenue, earnings and dividends have consistenly grown over the last ten years. 10 year EPS and owners earnings compounding growth rate is 8% and 7% respectively. We regard this as strong growth over a ten year period. However, 5 year EPS and owners earnings compounding growth rate is 1% and 0% respectively. Over the last 5 years growth has slowed significantly. This could be a key reason why the company decided to buy Mead Johnson.
How much is Reckitt Benckiser spending on maintaining assets?
With a capital expenditure ratio of 11%, less than 50% of the company’s profits is being spent on replacing/maintaining assets. This implies much of the company's profits are available for reinvesting in growth.
How well have Reckitt Benckiser used assets and shareholder equity?
Average return on capital employed is 20%. This is more than the 7% required to beat inflation. Average return on shareholder equity is 29%. This is more than the desired 15% which we regard as strong returns. Earnings per share from retained earnings have increased by 14% over the last ten years. In all, management has made good use of retained earnings, assets and shareholders equity to generate earnings growth.
Reckitt Benckiser and Mead Johnson Merger
Reckitt Benckiser recently purchased formula milk specialists Mead Johnson for $17.9 billion in an all cash deal. The aim of the purchase was to gain a geographical footprint in China, a region where Mead Johnson's products are extremely popular. This purchase is far from the normal acquisitions Reckitt Benckiser make. Milk formula is not linked to any of it's current brands and is an area dominated by Nestle and Danone. It is for this reason that many investors have decided to jump ship. What strategic rationale was behind this purchase? Are Reckitt looking to split it's business apart into a health unit and a hygiene one? It is clear that this has both upside and downside risks.
Future outlook for Reckitt Benckiser
Based on current price (6590p), the compounding rate of return we estimate if sold in ten years would be 13%.
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