Shares in consumer goods group Reckitt (LSE: RKT) soared today, adding over 6% in early trading. Could that be the first sign of a recovery in the deflated Reckitt share price?
The Reckitt share price has fallen
While the Reckitt share price is doing well today, it comes after a sustained period of underperformance. The share price has fallen 16% over the past 12 months, at the time of writing this article today. That reflects concerns ranging from cost inflation threatening profits to ongoing challenges in the company’s infant formula division.
So why has Reckitt been in favour today? Basically it comes down to the release of the firm’s third-quarter trading update this morning. The latest update contained news that boosted sentiment about the stock.
Growth in all areas
Compared to the equivalent period last year, the quarter saw like-for-like revenue growth in all three of the company’s divisions. Reported growth was negative in all three areas, by contrast, but investors seem okay with that. I think they are focussed on the business areas the company is retaining. On that basis, like-for-like numbers excluding assets the company has sold may be a more accurate guide to current business health.
What I think really excited investors was not the revenue story as much as the profit story. Full-year like-for-like net revenue growth is now expected to be around 1%-3%. I actually think that is stronger than it sounds, given that the comparative numbers last year include a boom in demand for hygiene products But more exciting in my view was that the company maintained its guidance on profit margins. A key risk to Reckitt’s profitability lately has been input cost inflation. If it is able to manage that without diluting its profit margins, that is reassuring news for investors.
Reckitt still looks cheap to me
While it has ticked up in trading today, the Reckitt share price is still a long way off its previous high prices. In 2017, the shares touched £80. Today they change hands at slightly less than three quarters of that level.
I continue to see an attractive investment case for Reckitt. It owns well-known premium brands such as Dettol and Vanish. That gives it pricing power, which can be helpful to combat the effect of inflation. The balance sheet still suffers from an ill-starred infant nutrition acquisition. But at least the company has been taking sizeable steps to put that behind it and focus on more successful parts of its operations.
The company is highly cash generative, and the current Reckitt dividend yield is 3%. If the business keeps recovering in coming years, as the update suggests it is doing, then I think it may restart dividend increases. Inflation impact on profit margins remains a risk. Weak performance in Europe compared to other regions could also threaten profits. Today’s update showed less benefit in price and mix changes in Europe, Australia, and New Zealand than elsewhere. But, considering the risks, I see Reckitt as a quality company. Improving performance could help the Reckitt share price recover. Even after the rise today, I would happily add it to my portfolio.
