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On Friday, RBC Capital Markets updated its view on Reckitt Benckiser Group PLC (LON:RKT:LN) (OTC: RBGLY), a consumer goods giant with a $43.28 billion market cap, increasing the price target on the stock to £57.00 from £55.00, while reaffirming an Outperform rating. The adjustment reflects the analyst's expectations around the company's operational changes and legal case developments. According to InvestingPro, the company maintains impressive gross profit margins of 60.56%, suggesting strong pricing power in its markets.
The analysis by RBC Capital anticipates certain cost duplications as Reckitt prepares to divest its Essential Health and Mead Johnson Nutrition businesses. The firm also suggests that Reckitt has historically underinvested, which may lead to a decline in margins and stagnation in free cash flow, despite gross cost savings. Nevertheless, the company has demonstrated financial stability, maintaining dividend payments for 33 consecutive years while operating with a moderate debt-to-equity ratio of 1.13.
However, the transition to what is termed 'Core Reckitt' is seen as a potential positive, likely to enhance management focus. Additionally, concerns regarding litigation related to the NEC (Necrotizing Enterocolitis) have lessened following a favorable outcome in the Whitfield case for the defendants, which included Reckitt Benckiser.
RBC's valuation of Reckitt Benckiser shares considers them undervalued. This is based on the firm's Adjusted Present Value (APV) methodology and a sum-of-the-parts analysis. The Outperform rating indicates the firm's positive outlook on the stock's potential performance.
The update from RBC Capital Markets comes at a time when Reckitt Benckiser is undergoing significant strategic shifts, with the planned disposals aimed at streamlining its operations and focusing on its core business areas.
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