Reckitt Benckiser: large cap, defensive, high growth, multi-national consumer products company.
Stock code: RB (UK market) or RBGPY:US
Reckitt Benckiser is a UK based, fast-moving consumer products company with a market cap of around 25 billion pounds or US$40 billion.
The company is multinational with many well-known brands including Clearasil, Nurofen, Durex, Mucinex and Strepsils…in the OTC healthcare segment, as well as many brands in the washing powder, detergents and personal care segments.
According to the 2009 annual report, the company had the following breakdown of sales:
North America 28%
Developing markets 19%
The company has achieved excellent growth in earnings with a compound growth rate over the last ten years of 19%, as shown by the figures below:
2010 226 (my estimate based on company guidance)
Based on the current share price of 3466.00 pence (US 11.31) the company is trading at a PE of 17.8 times 2009 earnings or 15.3 times my estimate of 2010 eps.
Using the growth rate of 19%, the PEG ratio (PE divided by growth rate), based on the 2010 eps estimate is 0.8 and 0.93 if based on 2009 eps figures.
For the first nine months of 2010 the company reported an increase in sales of 6% at constant rates and an increase in net income of 16% at constant rates and issued guidance for full year 2010 increase in net earnings of 16%.
The company has achieved this impressive growth by focussing on power brands and by making strategic acquisitions; the latest being the acquisition of the British healthcare company SSL International whose top brands are Durex and Scholl.
Based on the most recent information the company´s net debt to equity ratio is only 5%. The return on equity is very high at around 35%. It paid a dividend of 100 pence per share for financial year 2009, which results in a current dividend yield of 2.88% based on last years dividend, but the dividend will almost certainly be raised again for 2010.
The fact that the company sells fast moving consumer goods that people require for everyday use makes the company quite defensive in times of recession, as can be seen from the company´s earnings in both 2009 and 2010.
The major risks I can foresee are firstly the effect of the current increases in commodity prices and secondly a slow down in the current growth rate.
Since the company sells ‘power brands’ hopefully it will be possible for the company to increase prices to keep pace with inflation…but this remains to be seen.
In terms of the current growth rate, it seems obvious that at some stage growth must slow from the current 16% or ten year 19% compound annual growth rate.
To provide a basis for comparision, we could look at the two US companies, Clorox and Procter & Gamble. Based on data provided by Gurufocus, Clorox has had a ten year compound annual growth rate in earnings per share of 12% and has a PE ratio based on last years earnings of 14.89. This results in a PEG ratio of 1.24
P&G has a ten year compound annual growth rate of 11.5% and has a PE ratio based on last years earnings of 14.23. This results in a PEG ratio of 1.23
If Reckitt Benckiser full year 2010 guidance is correct and eps comes in at around 226, this results in a current PE ratio of 15.3 which is only marginally higher than that of either Clorox or P&G. (As stated above, the PEG ratio is only 0.8)
In other words it seems that a slow down in growth (16% last year) of Reckitt Benckiser is already built into the price, but without any evidence that a slow down is imminent.
If RB is able to sustain its current growth for another 5 years, shareholders will be very well rewarded, and based on the company´s track record there is every likelihood that this may happen.
However, even if growth does slow to the rate of its competitors, the downside is limited by the current market price.
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