Imterestingly most people assume Amazon isntrsdimg on a crazy high multiple . The reality is that their R&D expenses are 9-10% of revenues . If you adjust for those expenses which are used for sup/ normal growth you will find
That Amazon has been making 9-10% margins for years. Thats the worry for everyone who has to compete !
Bill -- I agree -- I'm likely to exit at 685X (it seems to want to cycle up and down to that level at the moment) and then sit and wait.
There's not a lot of money to made here in the short to medium term (wild guess of course) but it doesn't look or smell like a bargain, it also still carries the litigation risk in Korea and the debt load with Mead Johnson, even after the food sale isn't insignificant.
I'm not sure RB is a bid target either -- although anything could come out of the blue, and I see sterling strengthening from here.
Quite a few headwinds it seems is eminently possible.
Interesting that it points to fair value of £62-66, on his methodology. I am prepared to be a tad more generous, as previously outlined.
That said, you cannot forget that these have been distinctly favourable conditions, in terms of investor sentiment and favour, for such globally diversified, "stable growth" consumer blue-chips, and it will not always be so - anyone investing for the long term must be prepared to look through such cycles of sentiment, rather than hope to dip in and out successfully.
All in all, I would need to see it back down to something at least near the bottom of this range (ie. £62-66) to get on board in any reasonable size.
"""""I believe if the shift in strategy can be implemented successfully then going forward they can return to strong revenue growth. Despite the longer term potential I believe there will be better entry points in the low £60's to mid £50's."""""
"... I'll probably never be a holder of Amazon. Whether this is because I don't understand the reality of Amazon's significance is another story, but I'll be missing what ever future party it enjoys."
Me too, Games, me too... ultimately I need to be able to "see" 20x P/E, even if it's some way off. History tells us why. And I simply can't with Amazon - they are the ultimate disrupter who themselves will continually face disruption from elsewhere. They have created the environment which will dictate their own longer term fate.
"Are you still holding, or not, RB?"
No, still to take the plunge - maybe I will get the opportunity, maybe not. But £68 is probably 'fair value' for me - more or less - so I don't see the value opportunity. I do see the ongoing growth opportunity, but this will likely be steady rather than stellar - they're not going to get another big windfall from GBP collapsing again IMHO, indeed, this is more likely to go the other way.
And I fear the picture that could emerge on the MJ deal shortly, one year on...
"" but it will one day. Emperor's new clothes? I have no idea when it will be, or how much higher up, but you don't want to be holding Amazon stock when that particular emperor's nakedness is finally conceded....""
Bill, On a P/E of 149 - I'll probably never be a holder of Amazon. Whether this is because I don't understand the reality of Amazon's significance is another story, but I'll be missing what ever future party it enjoys.
"But interesting you didn't include Facebook in your list... the most likely of all the current internet giants to come crashing down to earth IMHO (albeit my opinion here is humble indeed, for good reason....)"
Bill - It is interesting, in that it's born out of my lack of interest and perhaps belief in social media - it tends to drown out thought, so I use it sparingly.
Facebook - Instagram - Snapchat - bla bla
I like PayPal because it grows very profitably (as does Facebook some would argue) and yet 85% of the world still uses cash -- I think 95% of the world is already on facebook (and it's free).
Microsoft -- probably grossly misunderstood by many as an ageing dinosaur that is past it's sell by date -- I love Dinosaurs, it's eaten it's way from my $10 entry to now $86 and my third largest holding on a monster yield from my entry point.
Bloomberg TV reporting RB to be among the companies working on a bid for the Merck consumer health unit. Not a huge surprise as RB buying this unit has been subject of speculation for some years.
Price was estimated at $4bn, it has 60% revenues in emerging market which makes it of interest to RB. 4B is not massive in RB terms, but not sure they need to be taking the eye off the MJ integration and fixing some of the other issues of last few months.
Merck consumer healthcare business, which offers vitamins brands such as Seven Seas alongside nasal decongestants. Merck kicked off the disposal process in Oct, inviting interested parties to view confidential data room.
Pfizer Consumer health also in play
In Oct FT said
In December 2015, Rakesh Kapoor, chief executive of Reckitt, said he would be very interested in Pfizers consumer unit if it came up for sale. However, Reckitt has since paid $16.7bn for Mead Johnson, the baby formula maker, and analysts have questioned whether it can afford a second big deal.
This change was reported by Bloomberg as a potential boost to overseas baby milk suppliers MJ not specifically mentioned but hopefully will benefit. It should make overseas produced formula more competitive in China, where they are highly sought after following the melamine scandal.
Regionally MJ shows manufacturing facilities in Guangzhou as well as Thailand and Philippines, but imports from USA or Holland at a premium would likely do better in the market.
Trump will no doubt take credit for influencing his new best mate Xi, it should play well with his bovine base.
China said it will further cut import taxes for a wide range of consumer goods including several categories of baby formula, in a bid to boost consumption. The countrys dairy stocks fell.
The average tariffs for 187 product categories ranging from baby diapers to blue cheese, coffee machines and ski equipment will drop from 17.3 percent to 7.7 percent after the cut, the Ministry of Finance said in a statement on its website on Friday. The change will be effective from Dec. 1.
China has faced criticism for not doing enough to bolster imports, a move that would help balance the trade surpluses that it runs with a raft of other countries. Commerce Minister Zhong Shan said this month that a range of measures to open domestic markets will be taken to support demand for imports, a move that could help narrow the $327 billion trade gap with the U.S.
Tariffs for some types of baby formula were cut to zero, triggering losses in Chinese dairy stocks. Inner Mongolia Yili Industrial Group Co. retreated as much as 4 percent, while China Modern Dairy Holdings Ltd. lost as much as 2 percent in Hong Kong. China Mengniu Dairy Co. slipped more than 1 percent with Yashili International Holdings Ltd.
"Let's hope it's Google and Amazon, as the other three I have held... Amazon -- probably will be around and probably will be a continual disruptor. It's decision not to declare a profit is largely voluntary and can be achieved if the investment rate is adjusted..."
Not sure what the "investment rate" is, Games, something entirely voluntary? There will be other Amazons along, and possibly smarter, more disruptive... though whether they ever get bigger is another matter. And I don't doubt, Amazon will put up a good fight...
There will be big changes as each new wave of internet innovation comes crashing, very likely with increasing frequency... some big winners, and big losers. But as to the what, the where, the who... as I said, I wish I knew!
But interesting you didn't include Facebook in your list... the most likely of all the current internet giants to come crashing down to earth IMHO (albeit my opinion here is humble indeed, for good reason....)
In a big report, apparently... looks like the reason for the SP spike today, in an otherwise newsflow vacuum.
So RB is worth anything from £64 to £90... hmmmm. And it is based - in part - on valuation vs peers, always a dangerous, and inherently circular argument, particularly with some peers still trading on historically very extended levels. But FWIW, edited highlights below:
"... In light of the low visibility on earnings and optionalities building up on M&A/disposals we run a scenario analysis to stress test valuation as RB's shares are now trading at a historical discount to peers following earnings cut since Q217. We conclude that a range of outcomes should lead to a valuation range of £64 to £90... While the top end of our valuation range is likely to be weighed on the progress of M&A/disposals on a 12-18 month basis, we see a short term relief potential to £75, hence our upgrade to Overweight...
... The creation of two separate divisions is creating options for structural portfolio shifts as we consider a potential disposal of H/H (we argue RB is not the best owner any more given share losses), the potential reinvestment in M&A in Health/Nutrition H/N or the creation of a standalone H/N business, in a category that will keep consolidating over time. Any newsflow on M&A/disposals will likely focus the market on the value unlocking from these options...
... we assess fair value around several scenarios: 1) on a standalone basis which is our core base for now, 2) a potential disposal of HH and buying of Pfizer OTC, 3) a SOTP. We derive a valuation range of £64-90, leaving the risk/rewards skewed to the upside. Over the next six months, a reassurance that EPS is not rebased further (as management presents its new division structure) and a rebound in LFL growth should drive the valuation multiples back to industry averages (versus a 16% EPS discount today) to JPM Dec18 TP of £75. We see further upside to the higher end of the range, although these will be weighed on the progress of M&A/disposals on a 12-18 month view."
"Of the five you mention, I'd be prepared to bet that 10 years from now, two (at least) will have sunk without trace"
Let's hope it's Google and Amazon, as the other three I have held and in the case of Microsoft for a very long time, PayPal looks like it has a long way to go -- Apple, I probably won't be holding it forever.
Amazon -- probably will be around and probably will be a continual disruptor. It's decision not to declare a profit is largely voluntary and can be achieved if the investment rate is adjusted. -- what that will do to the share price is anybody's guess.
".... so many examples of this aren't there? Next looks like one.... A modest rise would do me... GSK... Lloyds Bank; TheAA; Centrica, SSE, National Grid -- these were all blown up and possible have permanent air let out of them now.... The supermarkets look destined to live on much lower ratings, and possibly the pubs.... Pearson looks doomed to be a low rated stock -- is that also possible for WPP and Royal Mail?"
A "new reality" perhaps Games, or maybe only that "reality" is an ever-changing assessment, and can look very different from one month to the next, let alone years. Economies cycle up and down, companies rise and fall in longer duration, but equally inevitable secular cycles, and the market (and by definition, the investor consensus therein) changes it mind - and mood - on a dynamic and indefinite basis. Put all these "cycles" together and it explains why you get such wild swings in stock prices and valuations, even for supposedly predictable businesses.
Yes, can't see NXT getting back to £80 any time soon... but who knows, next year everything could look very different? Or the year after that - and as you say, you don't need it to get anywhere near to be a rather "good" investment - for you. It's the flip side of the situation with someone buying RB at £81 - a "good" company, no doubt, a great track record, for sure... but when do you start earning a good long-term return on your £81? It might well take the kind of patience that most investors claim to aspire to, but few in practice actually have.
Some stocks should probably always be on low ratings... doesn't mean they will be "bad" investments, depends what price you pay. And companies are dynamic entities, never standing still, run by people in a hurry - good management can make all the difference in the most moribund of stocks, but the converse also goes for bad management, or bad decisions....
"... there are loads of good companies still out there - PayPal, Microsoft, Apple; Google; Amazon..."
There are those that look "good", as of today, for sure... but next year, or next decade, it will quite likely be a different assessment. And easy to make the mistake of seeing a stellar stock going up in a straight line and assuming it defines a "good company"... There are plenty of genuinely "good" companies currently in the doldrums, with their markets disrupted, or possibly merely under a cyclical cloud, or just undermined by entirely external events outwith their control (eg. Brexit).
Of the five you mention, I'd be prepared to bet that 10 years from now, two (at least) will have sunk without trace, or as good as... but as to which two, I wish I knew! But it would be remarkable for really just the first wave of post-internet "winners" to survive the onslaught of future waves, each of them washing away a fair chunk of the existing establishment on the beach. Disrupters become themselves disrupted, in markets they helped to show were disruptable... their very success begets their ultimate fate.
There was some good analysis recently (might have been Kingham himself?) which showed why Amazon not only doesn't make a profit, but will never be profitable, structurally and unavoidably. Does it matter? Not thus far, and not today.... but it will one day. Emperor's new clothes? I have no idea when it will be, or how much higher up, but you don't want to be holding Amazon stock when that particular emperor's nakedness is finally conceded....
""base" for future performance, without fully considering the question of whether it might prove to be the sort of exceptional spike that most shares will "enjoy" periodically. "
Bill there are now so many examples of this aren't there?
Next looks like one -- I'm in it but at a very low level - it's always looked very expensive until now and I don't expect it to return to previous heights, unless I misunderstand the situation. A modest rise would do me.
GSK - is this also destined to have a lower rating perhaps?
And John Kingham's belief that Unilever is worth £23 (and I think you are at £37).
Lloyds Bank; TheAA; Centrica, SSE, National Grid -- these were all blown up and possible have permanent air let out of them now.
The supermarkets look destined to live on much lower ratings, and possibly the pubs, although every time I walk past (he lied) a Fullers pub it's alway packed to the gunnels.
Pearson looks doomed to be a low rated stock -- is that also possible for WPP and Royal Mail?
Perhaps we are welcoming in a new reality now that QE has failed and interest rates want to rise a bit more.
Games - still there are loads of good companies still out there - PayPal, Microsoft, Apple; Google; Amazon (not many this side of the pond though).
But as far as I can see, actually, no new BoD members? They are replacing the non-exec chairman with someone who is already a director... and putting another existing director in charge of the remuneration committee, in place of someone who has probably done it too long (as with the previous chairman). And yes, the double move was separately announced.
Plus ca change... as they say in Paris. Probably a small net positive move in terms of corporate governance, but doesn't seem like anything to move the needle at all in terms of strategy, etc. And very unlikely to do that much to clip the wings of a high-profile (and highly-paid!) CEO who some clearly seem to think is excessively powerful... that is fine as long as he is delivering, but history suggests these sort of leaders can go quite quickly when they stop delivering. MJ could easily prove his Waterloo... ?
Otherwise, there is some comment about 4 of the top 10 senior managers (note, not necessarily directors) leaving the company, but difficult to see anything by way of RNS confirmation, suggesting most / all are not THAT senior? Interesting, for sure, but could be a number of reasons for the departures - though probably some linkage to the recent restructuring of the business into two operational entities?
SEPTEMBER 19, 2017 Scheherazade Daneshkhu, Consumer Industries Editor 0 comments
Reckitt Benckiser has bowed to shareholder pressure by replacing Adrian Bellamy, who has chaired the company for 14 years, and the head of its remuneration committee.
The consumer goods group announced on Tuesday that it had appointed Christopher Sinclair, who joined the board two years ago and has held senior positions at PepsiCo and Mattel, the US toy brand, to replace Mr Bellamy.
The shake-up follows a management upheaval this month, when it emerged that four of the groups 10 senior managers were quitting for a variety of reasons amid analyst fears that Reckitt was set to miss its already downgraded target for revenue growth this year.
Judy Sprieser, head of the remuneration committee for the past 13 years, is to be replaced by Mary Harris, who joined Reckitts board two years ago.
Investors have for years criticised the length of tenures of Mr Bellamy and Ms Sprieser, who presides over the committee that determines the remuneration of Rakesh Kapoor, one of the best-paid chief executives in the UK.
They were most vocal at Reckitts annual meeting last year, when Mr Kapoor apologised for the sale of deadly disinfectants in South Korea that had been linked to the deaths of more than 90 people.
ShareSoc, an association of individual shareholders, said at that meeting that Mr Kapoors 2015 pay packet of £23m was indefensibly high, while the Railways Pension Scheme voiced significant concerns about the quality of board governance.
Samuel Johar, chairman of Buchanan Harvey, London-based headhunters, said on Tuesday of Mr Bellamy: The move was overdue six to nine years as chairman is more in line with best practice for a company of this size.
Mr Bellamy, 74, who lives in California, is to step down at Reckitts annual meeting next year.
JAB cuts Reckitt Benckiser stake
Lex - Reckitt Benckiser: four gone conclusion
Reckitt chief tries to find formula for Mead Johnson growth
During his tenure, Reckitt, whose products include Nurofen painkillers, Dettol disinfectant and Durex condoms, has delivered a total shareholder return four times greater than that of the FTSE 100 and employee numbers have more than doubled to 40,000.
However, revenue growth has slowed sharply more recently after a series of one-off problems, including the South Korea disaster, a cyber attack in June and the failure of a Scholl footcare launch.
JAB Holdings, Reckitts biggest shareholder, last week said it had further reduced its stake in the company, to 7.9 per cent from 8.9 per cent.
Iain Simpson, analyst at Société Générale, said the timing of Mr Bellamys retirement was unfortunate, coming in the same month as four RB executive board members departing and JAB selling down another 1 per cent of its stake. This news . . . may prompt further investor nervousness into third-quarter sales on 18 October.
A growing number of analysts believe that Reckitt is likely to miss its 2 per cent revenue target set in July after the cyber attack, which it cut from 3 per cent.
Mr Sinclair, who also lives in the US, was until recently chairman and chief executive of Mattel and previously head of PepsiCos food and beverage division.
André Lacroix, Reckitts senior independent director, said: The process to identify a successor to the chairman began some time ago . . . I am delighted that this process has now culminated with the appointment of an exceptional leader to carry on Adrian Bellamys work.
Reckitts share price fell slightly on Tuesday by 0.2 per cent in early London trading to £68.18. They are down 6 per cent over the past 12 months.
Copyright The Financial Times Limited 2017. All rights reserved.
"Because the sp has dropped 20% approx... This must be all the bad news / difficulty out there now ?... The MJ project has been debated / put in place etc ? ...Life goes on ? .....people buy products ?"
Maybe, maybe not SITH... many of their markets remain challenging. People will continue to buy products, but maybe not quite as many, and not necessarily buy them from RB, with an increasing preponderance of (mush) lower priced own-brand alternatives out there.
I am sure there will be at least some good news coming on MJ - possibly on accelerated cost savings from earlier integration, etc, at least that is fully under their own control. BUT unless there is a remarkable turn-around in MJ margins and hence profitability in H2, it is likely they will face some uncomfortable questioning - and negative media commentary - on the price they paid, and therefore the overall judgement of the deal, when we get to FY stage, only a few weeks away now (well, 3 months or so).
And I think some have made the mistake of "anchoring" to the £81 SP achieved (briefly) a few months back... it is easy to immediately jump on it as the new "base" for future performance, without fully considering the question of whether it might prove to be the sort of exceptional spike that most shares will "enjoy" periodically. After all, it was down below £60 as recently as early 2016, and never managed to sustain anything above £50 until into early 2015.... no reason I can see why £61 isn't a more reasonable "base" than £81?
I am playing devil's advocate, SITH, at least partly... you could be right, it may prove all upside from here, and I think the shares are certainly no worse than "fair value" down here, particularly if (as is likely) expectations on MJ have been rebased down to levels from which it should be relatively easy to "outperform" in delivery.
But there is nothing magic in the 20% decline figure, other than a nice round psychological milestone... particularly if it is "based" on an unrealistically high, and ephemeral, SP spike. Plenty of shares fall 20%... and then fall a good chunk more, over time. I know it too well, I've owned a few of them in my time...
Having threatened to break though £65 on the downside a few times now, but managing to bounce back each time, looks like the resistance is broken - and possibly decisively?
I am not sure what a chartist would make of it - nothing positive I would imagine? But just as likely, IMHO, to be a buying opportunity as anything more negative - though there does seem to be a distinct lack of buying interest here, particularly as other global consumer peers (eg. DGE, ULVR) are continuing to hold up pretty well.
"Actually the rot had firmly set in before H1. The MJ FY 2016 results showed a yoy volume decline of -6%, revenue -7% reported -3% constamt Fx. I read that Q3 result of +1% LFL as encouraging given the previous history..."
HE - yes, I did acknowledge this in an earlier post... but the collapse in margins, and hence profits, in H1 was a big incremental "surprise" - margins were holding up well as of FY16.
And I also agree on the better Q3 performance for MJ... but this was only a revenue data point, there was no update on margins/profits - for that we will have to wait, as you say.
"... you seem to be suggesting that RB dont improve MJ... RB are a world class Business who have the highest margins in their sector globally. They are experts at improving brands while increasing margins... I think, with their excellent record , they they should be given time to prove their strategy is right..."
VMB - I don't really disagree with any of what you say, nor was there anything in my post fundamentally at odds with this - I was merely addressing the question of why does RB face the charge of seriously overpaying for MJ, as things stand today. And it is not (just) my charge, it is the one reflected in a SP of £65-66 rather than the £81 only recently reached.
Nor is there any suggestion that RB are in any way to blame for the deterioration in MJ performance... I actually agree with you, I think RB will be able to deliver progressively better performance from MJ - which should be good for the SP, given the reset of expectations implicit in the current price. But the precise timing and quantum of this is less certain, and in the meantime, I think the charge will remain.
"Maybe MJ's recent woes are really down to management lassitude - and I get that the H1 slump could partly reflect an eye taken off the ball with the takeover underway. In which case, RB should be able to sharpen it up reasonably quickly and deliver a steady stream of good news from here. But maybe not... maybe the higher raw material costs will not quickly reverse, maybe the end markets will indeed remain tougher, and the competition fiercer?"
Actually the rot had firmly set in before H1. The MJ FY 2016 results showed a yoy volume decline of -6%, revenue -7% reported -3% constamt Fx. I read that Q3 result of +1% LFL as encouraging given the previous history, Of course Fx and other factors may be flattering the results, but noting that the RB Base business was -1% LFL Q3 it does suggest some strength in MJ. All will become clear in fullness of time.
Important message from the Financial Conduct Authority:
Posting inside information that is not public knowledge, or information that is false or misleading, may constitute market abuse.
This could lead to an unlimited fine and up to seven years in prison.
If you have any information, concerns or queries about market abuse, click here.
The content of the messages posted represents the opinions of the author, and does not represent the opinions of Interactive Investor Trading Limited or its affiliates and has not been approved or issued by Interactive Investor Trading Limited.
You should be aware that the other participants of the above discussion group are strangers to you and may make statements which may be misleading, deceptive or wrong.
Please remember that the value of investments or income from them may go down as well as up and that the past performance of an investment is not a guide to its performance in the future.
The discussion boards on this site are intended to be an information sharing forum and is not intended to address your particular requirements.
Whilst information provided on them can help with your investment research you need to consider carefully whether you should make (or refraining from making) investment or other decisions based on what you see without doing further research on investments you are interested in.
Participating in this forum cannot be a substitute for obtaining advice from an appropriate expert independent adviser who takes into account your circumstances and specific investment needs in selected investments that are appropriate for you.