Reckitt stock rating upgraded to Buy by BofA Securities

On Tuesday, BofA Securities analyst Victoria Petrova raised the stock rating for Reckitt Benckiser (LON:RKT:LN) (OTC: RBGLY) from Neutral to Buy, setting a price target of GBP 57.00. Petrova’s decision follows a review of the company’s first-quarter performance, which she believes aligns with the results of other major firms in the sector. According to InvestingPro data, the company maintains impressive gross profit margins of 60.7% and has consistently paid dividends for 34 consecutive years.

Reckitt Benckiser’s share price has experienced a significant decline, falling approximately 14% from its peak in mid-March. According to Petrova, this downturn appears unwarranted, especially considering the company’s recent quarterly results. These results demonstrated a growth close to 3% for CoreReckitt, which includes beating expectations on price but falling short on volumes, and a slowdown in developed markets as the quarter progressed. InvestingPro analysis suggests the stock is currently undervalued, with additional insights and valuation metrics available to subscribers.

The analyst pointed out that while Reckitt faces challenges such as weak consumer sentiment, lack of visibility, and competitive pressures, these are not unique to the company but are prevalent across the industry. Petrova has adjusted the forecast for Reckitt’s full-year CoreReckitt growth to 3.3%, reflecting a weaker start of the year in developed markets. Consequently, the projections for the group’s earnings per share (EPS) from 2025 to 2027 have been decreased by approximately 1.4%.

Despite the downward revision in growth and EPS estimates, Petrova believes that the stock’s recent pullback has created an opportunity for investors. She notes that the current price offers a 22% upside to the firm’s unchanged price objective of 5,700 pence (equivalent to $15.3), and the projected price-to-earnings ratio for 2025 is approximately 27% below the average for European staple stocks, based on BofA Securities’ calculations. This disparity in valuation led to the upgrade of Reckitt’s stock rating to Buy. The company’s solid fundamentals are reflected in its P/E ratio of 22.9x and robust free cash flow yield of 7%. InvestingPro subscribers can access additional financial health metrics and seven more exclusive ProTips about Reckitt Benckiser’s performance and outlook.

In other recent news, Reckitt Benckiser is in the spotlight as it moves forward with plans to sell its Essential Home division. The company aims to finalize this sale by the end of the year, with private equity firms Advent, Lone Star, and Apollo emerging as potential buyers. Reports suggest that bids for the division could reach up to £5 billion, although some offers are noted to be lower. This valuation is a decrease from earlier expectations, which had estimated the division’s sale value at over £6 billion. Barclays (LON:BARC) has reiterated its Equalweight rating on Reckitt, maintaining a price target of £53.60, despite the anticipated impact on earnings per share (EPS) from this strategic move. The projected EPS for 2027 is £3.50, which is below both Barclays’ base case and the broader consensus. Analysts at Barclays have noted that fluctuations in the sale price could significantly affect EPS, with a potential 17% dilution if the sale proceeds at the current estimated price. The sale is seen as a strategic move, though it poses challenges for Reckitt’s future earnings outlook.

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