Interactive Investor

Reckitt Benckiser's 16-year rally continues

18th April 2016 13:12

Lee Wild from interactive investor

Reckitt Benckiser's shares are within a whisker of a record high after first-quarter results beat expectations. It's been a difficult few months in some divisions, but consumer health brands like Nurofen headache pills, Strepsils throat sweets and Durex condoms have been selling like hotcakes. It's why investors are stocking up on the shares again Monday.

Revenue jumped by 5% in the three months to £2.3 billion in March, up 5% on a like-for-like basis. JP Morgan had pencilled in growth of little more than 4% for the quarter and consensus was for only marginally more. Sales at Reckitt's health business, which generates over one third of net revenue, beat forecasts with a 10% surge to £786 million, also helped by foot care brand Scholl.

Elsewhere, sales of Dettol and Harpic bleach were up in India, while demand for pesticides in Brazil spiked following the Zika virus outbreak. That nudged sales at the hygiene unit up 3% to £959 million. Growth was matched at the smaller home division as Air Wick fresheners sold well.

Despite a foreign exchange hit, highly-paid chief executive Rakesh Kapoor says the firm is on track to grow like-for-like net revenue by 4-5% in 2016 and improve operating margins.

Reckitt Benckiser shares are up over 8% in 2016 so far to over £68 versus the FTSE All-Share index barely in positive territory. In early 2000 they could be bought for just 580p. They currently trade on over 24 times forward earnings - a pretty gutsy multiple - explained by the so-called "flight to quality" stocks amid all the market pessimism and volatility. It a reason we backed Reckitt to "clean up" seven months ago with the shares at 5,962p.

A recent report by Barclays pointed out that ratings for the consumer staples sector were back near the highs seen during the tech bubble in 2001 (see chart below).

However, Kapoor's heavy hint that this was a weak start to the year suggests guidance looks conservative, according to JP Morgan, especially since this performance came in at the top end of company guidance.

"Accelerating margin and sector-best top-line growth lead us to expect Reckitt Benckiser to deliver the sector’s strongest organic [operating profit] growth over the next few years," writes the broker, which has an 'overweight' rating on Reckitt with 7,150p price target.

"Despite trading at a premium to peers, we believe that its better EPS delivery and visibility, along with optionality for higher cash return and/or M&A, should sustain a stronger sector premium and secure share outperformance."

Ongoing speculation that Reckitt will buy big at some point should maintain interest in the shares. Talk is it has its eye on Pfizer's consumer health business, and Kapoor had told Bloomberg TV he'd be "very interested in looking at it". The situation remains unclear, however, given Pfizer's failure to buy Allergan for $160 billion.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.