Reckitt Benckiser's performance not to be sniffed at, says leading bank

UBS forecasts Reckitt Benckiser will report robust Q3 like-for-like sales growth of 7%, a significant acceleration from Q2's 1.9% that positions the company to meet its full-year target, driven by a 20% sales rebound in the Mead Johnson infant nutrition unit and strengthening core health and hygiene segments. This improved performance, including expected reported sales of £3.6 billion, is projected to boost profitability, with margins potentially exceeding 25% and EPS 2% above City forecasts. The outlook suggests considerable upside, given the shares trade at a 16% discount to European household goods peers, with UBS setting a 7,700p price target.

Analysis

A recent analyst note from UBS projects a significant operational acceleration for Reckitt Benckiser in the third quarter, setting the stage for a potentially strong earnings report on October 22. The bank forecasts like-for-like sales growth of 7%, a sharp increase from the 1.9% reported in the spring, which would position the company to achieve its full-year growth target of 3-4%. This recovery is driven by a standout 20% sales rebound in the Mead Johnson infant nutrition unit, which is recovering from prior-year supply chain disruptions in the U.S., and a strengthening in the core health and hygiene segments aided by a steadier cold and flu season. The improved sales mix, with a higher contribution from cough and cold products and stronger volumes at Mead Johnson, is expected to lift profitability, with margins potentially exceeding the 25% consensus and earnings per share coming in approximately 2% ahead of City forecasts. At its current price of 5,726p, the stock trades at a 16% discount to European household goods peers on a forward earnings multiple of 16x, suggesting considerable upside potential if the company's results align with UBS's 7,700p price target.

Key Decisions for Investors

• Given the forecast for significant top-line acceleration and margin expansion, coupled with a 16% valuation discount to peers, investors may consider the stock favorably ahead of the October 22nd earnings release.
• The primary catalyst is the recovery in the Mead Johnson division; a key focus for investors should be on validating the forecasted 20% sales growth and scrutinizing management's outlook for the unit's sustained performance.
• As this analysis is based on an analyst forecast, investors should be aware that a failure by the company to meet the heightened expectations for 7% like-for-like growth or margin uplift could serve as a significant negative catalyst for the stock.