Summary:

• Reckitt Benckiser’s valuation (RB.UK on xStation5) has eroded which may pose an interesting opportuning given its solid position in the market

• Brokerage houses see over 14% upside for the company’s market cap in the next 12 months

• Reckitt Benckiser stock is rebounding from an important support

Reckitt Benckiser is a multinational consumer goods company. It owns scores of popular brands of health, hygiene, and home products, such as Calgon, Sholl or Cillit Bang. Valuation of the company declined over 16% from its 2017 highs to return to the lows from the beginning of the year. This drawdown was a ramification of concerns over a controversy in South Korea, questionable acquisition of a baby formula maker Mead Johnson, and sale of a food business to McCormic. However, Reckitt Benckiser still holds firm in its key industries and given the improved outlook for the second part of 2017, the company may lure investors.

Improving financial footing

Let’s start with some financial figures for the last five years. In this period the company consequently delivered solid numbers in regard to both revenues and net income. The data shows that its portfolio of brands still offers relatively high profits. The company’s 5-year average of revenues is at above 9bn GBP, whilst 5-year average of net income is close to 2bn GBP. On the other hand, there are some issues which have weighed on the stock valuation. Firstly, over the past year the debt to total capital ratio leaped to 67.57% from 10.41% previously. The increase of debt burden was attributed to acquisition of Mead Johnson, the producer of nutrition for infants, for 17.9bn USD. It was a relatively low price as the purchased firm was struggling and now Reckitt Benckiser faces a challenge to recover this business using its expertise. This investment poses an opportunity for the company to strengthen its position in developing markets such as China in particular. One should also remember, that after a sale of a food business to McCormick for 4.2bn USD, the debt concerns have eased to some extent.

Reckitt Benckiser is on the right footing in terms of revenues and profits. Source: Bloomberg, XTB Research

Attractive valuation and decent dividend yield

Reckitt Benckiser looks quite compelling compared to its closest rivals. The company valuation is quite attractive as its PE ratio is at 23.66x, slightly below the industry average of 24.44x. Moreover, the corporation’s revenues growth rate for the last year was over 11% yoy, whilst the average amounted to 2,70%. Reckitt Benckiser may also boast about its decent dividend yield of 2.30%.

  Reckitt Benckiser has a quite attractive valuation and offers a decent dividend yield. Source: Bloomberg

A majority ofanalysts rate Reckitt Benckiser as a “buy”

Brokerage houses in large part remain positive about Reckitt Benckiser’s outlook. 14 out of 28 recommendations suggest a ’buy’, 12 calls indicate a ‘hold’ and only 2 of the brokerages advises a ‘sell’. The average price target is at 80 GBP which gives over 14% upside potential compared to present market price.

  Brokerage houses are slightly optimistic on Reckitt Benckiser’s prospects. 14 out of 28 recommendations suggest a ’buy’, 12 calls indicate a ‘hold’ and only 2 of them advises a ‘sell’. Source: Bloomberg

Increasing bullish momentum

The stock was moving downward during the second and the third quarter of 2017. Nevertheless, the declines were halted at the support of 67 GBP. Note that the current rebound is pretty substantial which may suggest that the prices have bottomed out already. Having the 23.6% Fibo retracement broken, one may expect a re-test of this handle now acting as a support. A move towards 38,2% retracement of the last huge descending wave could be in the cards. This level also corresponds with local lows from August which underscores its importance for further price actions.

Breaking of 23.6% Fibo retracement underlines current bullish momentum. Source: xStation5

Conclusion

The bottom line is that a recent weakness in Reckitt Benckiser’s stock could prove to be just temporary. Acquired company may boost expansion in developing markets in a long run and a sale of the food business should limit concerns over excessive debt. It’s also worth mentioning that the latest price actions have turned to be more favorable for bulls.

CFDs and synthetic stocks on Reckitt Benckiser are available on xStation under the symbol RB.UK. Both long and short positions are possible.