Is the Reckitt share price a bargain?

I have had my eye on consumer goods company Reckitt (LSE: RECK) as a possible investment for my portfolio for a while. I like its stable of well-known brands. That gives the manufacturer pricing power, which can help it maintain profits even as inflation increases. The Reckitt share price is now 3% cheaper than a year ago. Is now the time to buy it for my portfolio?

Attractive business

As the company behind premium brands such as Dettol and Clearasil, Reckitt has pricing power. Customers feel there are no direct substitutes for their favourite brands. So they are more likely to remain loyal even if Reckitt decides to raise prices. That is good for maintaining profitability at a time when inflation is pushing up the cost of ingredients and distribution.

In its full-year results today, Reckitt reported that like-for-like net revenue growth of 3.5% exceeded expectations. I think that figure is even better than it sounds, given that last year already saw surging demand for Reckitt’s products. Its health and hygiene focus matches a shift in customer needs, driven by the pandemic. Encouragingly, the company pointed out that it saw strong momentum across its business, not just in brands spurred on by pandemic dynamics.

Excluding a problematic infant formula business that it has largely exited, the operating margin fell from 24.5% to 22.9%. A fall is never good, but I think the drop is modest given the cost inflation the company has experienced.

Reckitt share price slide

Given the strong business performance and positive outlook for the company, why have the shares slid over the past year?

The company’s infant nutrition business continues to drag on its performance, although its decisive steps to withdraw from most of the business mean that it should fade into history in coming years. Inflation concerns have also hit investor sentiment. Reckitt has done a good job managing cost increases so far, but they remain a key risk to profitability.

Is the price a bargain?

On one hand, the company’s brand portfolio is attractive and its sharpened strategic focus is returning the company to financial health. But there are some challenges too. The dividend has been held flat, meaning the current Reckitt yield is 2.9%. I think that is decent, but not especially exciting. Meanwhile, total adjusted diluted earnings per share last year fell almost 12%. Partly that was due to exchange rate movements, an ongoing risk for the multinational company that remains outside its control.

The Reckitt share price is well below its past highs. It is 14% lower than five years ago, for example. The business has less obvious momentum than it had in its heady growth period, so I think that makes sense. The current market capitalisation is around 15 times last year’s operating profit. I find that valuation attractive for a company of Reckitt’s quality, but it is not what I would call a bargain. After all, operating profits, earnings and margins all declined last year. Clearly there is work to be done in continuing to fix Reckitt, even if management has been moving in the right direction.  

For now, I will keep watching the shares. I do not see them as a bargain, but I do regard them as fairly priced and might consider adding them to my portfolio.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Reckitt plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.