The share price of Dettol and Nurofen owner Reckitt (LSE: RKT) has taken a huge hit in recent years. Back in 2020, it was near 8,000p. Today however, it’s sitting at 4,130p – about 48% lower.
Is the share price a bargain at current levels? Or could we be looking at a value trap? Let’s discuss.
Recent results
Reckitt’s recent results for the first half of 2024 weren’t terrible.
For the period, like-for-like net revenue growth was up 0.8%. Meanwhile, free cash flow was up 8.3%.
Looking ahead, the company said that it plans to offload its portfolio of homecare brands (which includes Air Wick and Cillit Bang) by the end of 2025 to focus on healthcare and hygiene. This business generated sales of around £1.9bn last year and analysts at Jefferies reckon a sale could bring in nearly £5bn.
Significant uncertainty
The problem is that there’s a lot of uncertainty here right now due to Mead Johnson infant formula litigation.
Back in March, an Illinois court awarded $60m in damages to a mother whose child died after consuming Mead Johnson formula milk.
More recently, on 29 July, a jury found that Abbott Laboratories‘ formula for premature infants caused an American girl to develop a dangerous bowel disease, which led to the company having to pay a whopping $495m in damages.
There are likely to be more of these types of cases looking ahead. According to Reuters, close to 1,000 lawsuits have been filed against Reckitt, Abbott, or both in US federal or state courts.
It’s worth noting here that analysts at JP Morgan have estimated that the per settlement amount could fall in the $150k-$300k range, equating to a total settlement of $500m to $1.5bn. Analysts at Bernstein believe total liabilities could be closer to $2bn.
So, it’s hard to know what Reckitt’s earnings are going to look like in the next few years. And if we don’t know what earnings are going to look like, it’s hard to know if the stock is a bargain or a value trap.
Undervalued today?
Let’s say the company manages to navigate this issue without getting badly burned though. In this case, the stock could be cheap today.
I saw an interesting analysis recently that put the value of Reckitt’s hygiene business at about £20bn (using price-to-sales valuation multiples in line with peers Procter & Gamble and Church & Dwight) and the value of its health business at £24bn (using price-to-sales multiples in line with peers Haleon and Johnson & Johnson).
Add in £5bn from a sale of the homecare brands, and we could be looking at a total valuation of £49bn (including net debt) before the troubled infant formula division. Given that the company’s enterprise value today is around £37bn, it could be significantly undervalued.
Will I buy?
Now, I have owned this stock in the past. I sold it earlier this year due to the Mead Johnson litigation uncertainty.
I may buy it back at some stage in the future. However, I won’t be buying back in until there’s a bit more clarity in relation to the litigation.
Until there’s less uncertainty here, I think there are better stocks to buy for my portfolio.
