Analysts at Credit Suisse took a fresh look at consumer goods giant Reckitt Benckiser on Tuesday, downgrading the firm's shares from 'neutral' to 'underperform' based on a new and “in-depth analysis of its top-line growth” over the last two years.
Using Nielsen data to analyse eight category and geography cells representing roughly 40% of Reckitt's developed market sales from its last financial year, the broker was able to present evidence of volume declines which had been offset by higher selling prices, but noted its analysts were particularly concerned about the firm's over the counter consumer health business, highlighting the pressure on the division as a result of fewer science-based innovations and increased competition from generics.
“On the back of our differentiated analysis, we assume RB will have to reset pricing/increase investment to revive developed market volume growth/competitiveness,” the analysts wrote in their Ideas Engine report
Besides cutting Reckitt to 'underperform' from its previous 'neutral' stance, CS also reduced its target price to £55.50 per share from £63.00.
Credit Suisse now also expected the group's developed market sales to shrink in 2018, along with a 100 base point reduction in its underlying margins between 2017 and 2019.
“Our FY19E EPS, which we have reduced by 6%, is now 12% below consensus. In our view, last year's debt-funded acquisition of MJN prevented RB from acquiring the much more synergistic Pfizer consumer healthcare business,” the analysts concluded.
“We expect management to guide margin expectations lower as we go through the year.”