Is FTSE 100 Stalwart Reckitt Benckiser Good Value?

LONDON -- Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:

• growth in earnings, and
• an upwards P/E rerating.

Highly successful fund manager Peter Lynch classified steady growers as Stalwarts, which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.

Seeking durable growth
Not all companies achieve stable growth, as you can see by the aggregate performance of those in London's premier FTSE 100 index, where the compound annual earnings-growth rate has been just 0.7% over the last five years:

Consistent, cash-flow-backed growth in profits is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.

One contender is Reckitt Benckiser Group (RKT 0.68%), which produces some of the world's best-known consumer brands based mainly around household cleaning products. This table summarizes the company's recent financial record:

So, earnings have grown at an equivalent 18.5% compound annual growth rate, putting Reckitt Benckiser in the Stalwart category.

Investors have long been attracted to consumer brands companies such as Reckitt Benckiser for their defensive qualities underpinned by solid repeat business. Once happy with a brand, consumers tend to stick with it, so when the packet runs out they tend to repurchase -- all of which leads to steady cash flows for firms like Reckitt.

But brands don't become star players by accident and Reckitt works hard to ensure that what it calls its "powerbrands" are "driven by innovation, rolled out globally, and heavily marketed." Think of those repetitive TV ads for floor cleaning products and washing powder and you'll understand how Reckitt gets its products into consumers' shopping trolleys.

It's a strategy that works. You'll be familiar with many of the company's brands such as Cillit Bang, Finish, Vanish, Calgon, Durex, Nurofen, and Strepsils. Right now, the firm is seeing strong growth in emerging markets, which constitute around 24% of revenues. Its remaining revenues from the developed world have been a little flat lately but the share price indicates that expectations are for steady growth to get back on track soon.

Reckitt Benckiser's earnings growth and value score
I analyze five indicators to determine whether earnings growth can continue and if the shares offer good value:

1. Growth: revenue and earnings have been growing steadily with cash flow a little bumpy. 3/5
2. Level of debt: net gearing of around 34% with borrowings less than annual earnings. 4/5
3. Outlook and current trading: satisfactory trading and a cautiously positive outlook. 4/5
4. Enterprise value to free cash flow: around 19 and close to historic earnings growth. 2/5
5. Price to earnings: a trailing 16 or so and around historic earnings growth rate. 3/5

Overall, I score Reckitt Benckiser 16 out of 25, which encourages me to believe this stalwart can continue earnings growth that out-paces that of the wider FTSE 100. The shares seem fairly priced when compared to the FTSE's price to earnings ratio of around 11 and the firm's growth predictions.

Foolish summary
Growth has been steady and debt is under control. Recent satisfactory trading is encouraging when taken with the mildly positive outlook but forward expectations seem high given the current level of the share price. Earnings forecasts have yet to catch up.

Right now, forecast earning growth is 1% for 2013, and the forward P/E ratio is 15.7 with the shares at 3,916 pence. Considering that and the other factors analyzed in this article, I think that the market is anticipating further earnings growth going forward. The shares can stay on my watchlist, for now.

Reckitt Benckiser is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.

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