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Philip Gorham
  • Philip Gorham

In Line 4Q for RB; Shares Undervalued but Margin Pressure May Be Susta...

Reckitt Benckiser posted modest upside to our estimates in fourth-quarter 2018, with recovering like-for-like sales growth and solid operating income growth. Management guided to 3% to 4% like-for-like sales growth in 2019, in line with our forecasts, and we are maintaining our GBP 73 fair value estimate and wide moat rating. We see upside to the stock from current levels, and we think the strategy to reposition RB into a consumer health business will strengthen the business for the long run. Fo...

Philip Gorham
  • Philip Gorham

Another Disappointment for RB Investors as Operational Mis-step Drives...

RB missed our forecasts on organic growth in the third quarter due to an event that management described as a “technical issue” at an infant formula plant. This overshadows what was otherwise a fairly strong quarter, with an above-par performance at the hygiene and home division. Despite the miss, management reiterated guidance for the full year, which implies organic growth of at least 3% in the fourth quarter. We have slightly lowered our short-term assumptions to account for the disruptio...

Philip Gorham
  • Philip Gorham

Thesis Playing Out as Formula Rebounds for RB; Limited Upside Remains

RB delivered a welcome beat and raise in the second quarter, amid signs that the company is getting close to returning to the above-industry average rate of organic growth that we think it can achieve in the medium term. Particularly pleasing was the fact that the upside came from the former Mead Johnson business infant formula business--a controversial acquisition, but one that we think will help deliver the upside to the stock. Management raised its full-year sales growth guidance slightly, an...

Philip Gorham
  • Philip Gorham

RB Still Underearning as Scholl Blamed Again for Weakness; Shares Unde...

Following a fairly soft first-quarter trading update, RB appears unlikely to rebound to its normalized organic growth rate this year as we had hoped, so we are lowering our fair value estimate to GBX 7,300 from GBX 7,400. Our longer-term thesis is intact, however, and we think the portfolio repositioning has created a wide-moat business with price/mix that should support above-industry-average growth in the medium term. We believe the shares offer an attractive discount to our fair value estimat...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

The Mead Johnson Acquisition May Not Be Intuitive but Positions RB for...

RB closed the books on a year to forget in 2017 with a fourth quarter that showed that although it is far from firing on all cylinders, the core business appears to be stabilizing. These results show that RB is not immune from the ongoing structural changes in consumer staples retail, but with a portfolio that is increasingly skewed to businesses with pricing power, a key reason for our wide moat rating, we think RB has a better chance than most in its peer group of reigniting organic growth. Th...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

Reckitt is building a business with pricing power and wide margins.

RB's third-quarter trading update showed that the firm is performing in line with our expectations for the full year on an organic basis. The bigger news, however, was the announcement of a restructuring of the business, which we believe may be a precursor to further transformative portfolio changes. We are reiterating our wide moat rating and our GBX 7,400 fair value estimate. Although RB is having a tough year, we think the pricing power inherent in the consumer health business will drive abov...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

No Inflection Point Yet for RB, but Restructuring Points to Sharper Fo...

RB's third-quarter trading update showed that the firm is performing in line with our expectations for the full year on an organic basis. The bigger news, however, was the announcement of a restructuring of the business, which we believe may be a precursor to further transformative portfolio changes. We are reiterating our wide moat rating and our GBX 7,400 fair value estimate. Although RB is having a tough year, we think the pricing power inherent in the consumer health business will drive abov...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

No Changes to Our View Following RB's First-Half Update; Shares Fully ...

After the recent low following the cyberattack that will shave a percentage point from this year's sales growth rate, and the high of receiving a 21 times EBITDA valuation for its food business, RB's first-half report felt like a nonevent. We reiterate our wide economic moat rating and our GBX 7,400 fair value estimate for the ordinary shares, as most metrics were consistent with our expectations and our near-term forecasts are in line with the updated guidance. This is a much weaker performanc...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

RB Receives 'RedHot' Valuation for Food Assets; Modestly Raising FVE

RB realized a valuation for its food business that was materially above our estimate, and we are raising our fair value estimate to GBX 7,400 per ordinary share from GBX 7,300. The food assets, which include French's mustard and Frank's RedHot sauce,  will be sold to McCormick for a whopping $4.2 billion (GBP 3.2 billion). This disposal will help to finance the $17 billion acquisition of Mead Johnson, the catalyst for our recent economic moat rating upgrade to wide from narrow. The deal does no...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

Love the Portfolio, Don't Love the Valuation; Upgrading RB to Wide Eco...

We upgrade our economic moat rating for RB to wide from narrow and raise our fair value estimate to GBX 7,300 from GBX 7,000 following the closure of the Mead Johnson acquisition. We believe the consolidation of Mead into an already solid portfolio will create a business that is entrenched in its customers' supply chains and boasts pricing power in a little over half of its brand mix. We admire the empire being built by CEO Rakesh Kapoor, but with the stock at 20 times 2018 earnings, and trading...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

Reckitt is building a business with pricing power and wide margins.

We are lifting our valuation for wide-moat Mead Johnson to $87 per share from $86 to reflect the time value of money after the firm posted first-quarter earnings. The company’s pending $17 billion acquisition by Reckitt Benckiser for $90 per share remains on track, and the firm continues to expect the transaction to close by the end of the third quarter. With the transaction well on its way and Danone’s acquisition of WhiteWave successfully closed after a lengthy anti-trust review (quelling ...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

No Change to Outlook as Mead Johnson Posts Earnings; Acquisition on Tr...

We are lifting our valuation for wide-moat Mead Johnson to $87 per share from $86 to reflect the time value of money after the firm posted first-quarter earnings. The company’s pending $17 billion acquisition by Reckitt Benckiser for $90 per share remains on track, and the firm continues to expect the transaction to close by the end of the third quarter. With the transaction well on its way and Danone’s acquisition of WhiteWave successfully closed after a lengthy anti-trust review (quelling ...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

Reckitt's 1Q Demonstrates Value of Portfolio-Repositioning Strategy; S...

Reckitt Benckiser’s year got off to an unspectacular start, with first-quarter like-for-like sales flat with the year-ago period. The company appears on track to meet our estimate of 3% organic sales growth this year, however, as it will cycle easier comparisons later in the year. We are reiterating our GBX 7,000 fair value estimate and our narrow moat rating. We like Reckitt’s strategy of positioning the portfolio towards categories with pricing power, though the business still operates in ...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

Reckitt’s Review of Food Assets Next Step in Its Pricing Power Trans...

On April 3, 2017, Reckitt Benckiser confirmed media reports that it is carrying out a strategic review of its food business. This is consistent with our thesis that management is building a strong consumer product portfolio, and we would regard a sale of the food segment as a sensible step towards deleveraging from the Mead Johnson acquisition. We maintain our GBX 7,000 fair value estimate for the time being, but we may review our narrow moat rating if the firm disposes of the food business, as ...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

Mead Johnson Shareholders Could Benefit From a Reckitt Benckiser Acqui...

Wide-moat Mead Johnson has drawn interest from narrow-moat Reckitt Benckiser, with the latter firm in advanced talks to buy the infant-formula-maker for $90 per share ($17 billion), financed with cash and debt. Acquisition speculation has followed Mead Johnson since its 2009 IPO, and the firm has been linked to a variety of suitors (particularly competing formula-makers Danone and Nestle). However, because we do not have any insight as to whether a deal will ultimately materialize, we are holdin...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

Reckitt on Track in Q3; Shares Still Slightly Rich Despite Currency Ta...

Reckitt Benckiser's third-quarter trading update keeps the firm on track to meet our full-year forecasts on an organic basis, but we are slightly raising our near-term revenue growth assumptions to account for the continued weakness in sterling. Around 85% of Reckitt's revenue, but significantly less of its costs, is derived from outside of the United Kingdom, and the recent depreciation of sterling against other major currencies is providing both a transactional and translational benefit to Rec...

Philip Gorham ... (+3)
  • Philip Gorham
  • CFA
  • FRM

Reckitt's Korean Business Implodes, Dragging Down an Otherwise Solid Q...

Reckitt Benckiser's second-quarter results were materially hampered by a steep decline in sales in South Korea after the company accepted responsibility in May for having sold a toxic humidifier disinfectant in the country between 2001 and 2011. Reckitt took an after-tax charge of around GBP 300 million related to the issue in the second quarter. The utter implosion of Reckitt's business in Korea highlights the tenuous power of brands as a competitive advantage in certain categories, in our opi...

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