Please ensure Javascript is enabled for purposes of website accessibility

Should You Buy Reckitt Benckiser Today?

By Royston Wild - Apr 10, 2013 at 8:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How attractive are the shares of Reckitt Benckiser?

LONDON -- I believe that shares in Reckitt Benckiser (LSE: RB) (RBGL.Y 0.46%) are vastly overpriced and are overdue for a weighty correction. The stock has risen 19% since the turn of the year, and currently trades at a 35% premium to Canaccord Genuity's 3,425 pence target price.

The firm is a giant in the household cleaning product and non-prescription health-care space and whose global brands include Dettol, Clearasil, Nurofen, and Durex, among others. But in my opinion, its loss of exclusivity on its Suboxone drug -- which is used to combat narcotics addiction -- could harm revenues moving forward and sour investor appetite for the company.

Rivals gear up for assault
The U.S. Food and Drug Administration (FDA) halted Reckitt Benckiser's patent on the anti-addiction product, a move that will herald the entry of cheaper, generic rivals to the Suboxone brand and harm sales over the medium to long term. Suboxone tablet sales in the U.S. represented around 5% of the firm's total revenues last year, while film made up closer to 10% of group turnover.

Indeed, BioDelivery Sciences International announced last month that it plans to file an NDA with the FDA for its Bunavail film by July, which is considered a massive threat to Suboxone moving forward. It reckons that the new film could grab between 25% and 35% of the branded market, and plans to launch the product next year.

Earnings pressure set to materialize
Broker Liberum Capital expects earnings per share (EPS) to nudge 1% lower in 2013 to 262 pence, before the effect of falling Suboxone revenues drive EPS 4% lower to 252 pence. The company currently trades on a price-to-earnings (P/E) ratio of 17.7 and 18.5 for this year and next, trading at a premium to a forward earnings multiple of 14.5 for the wider household goods and home construction sector.

Reckitt Benckiser has steadily built the dividend in recent years -- 2012's 134 pence shareholder payout was up 7% from the previous year -- but yields are expected to remain around the 3.3% FTSE 100 average over the medium term. A figure of 3.1% and 3.3% are expected by Liberum's analysts in 2013 and 2014, respectively.

These prospective payments provide coverage just below the safety watermark of two times for these years, although I believe that the effect of falling earnings could cast doubt on the progress of its dividend policy moving forward.

The prescription for plump returns
Although Reckitt Benckiser presents too much risk in my opinion, check out this newly updated special report that highlights a host of other FTSE winners identified by ace fund manager Neil Woodford.

Woodford -- head of U.K. Equities at Invesco Perpetual -- has more than 30 years' experience in the industry, and has identified two other fantastic pharmaceutical specialists in the report set to deliver spectacular investor returns.

The report, compiled by The Motley Fool's crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

BioDelivery Sciences International, Inc. Stock Quote
BioDelivery Sciences International, Inc.
Reckitt Benckiser Group plc Stock Quote
Reckitt Benckiser Group plc
$15.30 (0.46%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.