Consumer goods giant Reckitt (LSE: RKT) has had a challenging several years. Like its competitors, it has been wrestling with input cost inflation, which continues to threaten profit margins. But it has also been dealing with some problems of its own making, notably its ill-fated acquisition of an infant formula business a few years ago. The Reckitt share price has fallen 4% over the past year, as I wrote this article earlier today.
But just last year, these shares traded above £77. Could they get back above £70 in the coming year?
Understanding the Reckitt share price fall
To consider where the Reckitt share price is going, it is instructive to reflect on where it has come from. The reason for its fall in 2020 was fairly simple. Investors were concerned that mounting cost inflation would hurt its profit margins. They also continued to have concerns about the long-term impact of the infant formula business on Reckitt’s results.
I think inflation remains a risk. But the company owns in-demand brands such as Dettol. That means it doesn’t necessarily need to compete on price alone. That gives it pricing power, which can support profit margins. In its most recent quarterly trading statement, the company maintained its guidance on profit margins. In other words, it seems to have the inflation challenge under control – for now at least.
I also think the company has been making the right moves when it comes to its infant formula business. It took a massive writedown on its book value last year and has since exited a large part of the business, notably in China. That has been painful and casts a shadow on the judgement of previous management. But looking forward, it suggests that those infant formula woes should no longer dog the company.
So, I think both the key drivers for the share price fall are being well handled.
Upside price drivers
But is that enough to push the Reckitt share price further upwards in 2022?
For that, I think the company needs not only to show that it is managing its challenges but also that it is producing growth. Again, I think the company’s strong recent performance gives grounds for optimism here. In the parts of the business that it is keeping, the company saw growth in all of its operating areas in its third quarter. That is despite high demand the prior year making for a tough comparative baseline.
With its health and hygiene focus, I think the company is well-positioned to capitalise on long-term concerns brought about by the pandemic. That should help both revenues and profits.
Getting to £70 in 2022 would require about a 14% increase from today’s Reckitt share price. Drivers for that could include sales growth, continued good news on profitability or a shift in investor sentiment back in favour of defensive stocks such as consumer goods companies. If there is an economic downturn, I see that as possible.
On that basis, I do think the Reckitt share price could hit £70 in 2022 and I would consider adding it to my portfolio now.
