Barclays downgrades Reckitt Benckiser to ’equal weight,’ citing execution risks

Investing.com -- Barclays (LON:BARC) in a note dated Tuesday downgraded Reckitt Benckiser Group (LON:RKT) to "equal weight" from "overweight," arguing that the company’s ongoing strategic transformation, while necessary, presents execution risks that could weigh on its earnings per share until at least 2027.

The analysts said that Reckitt’s valuation may appear attractive at first glance, with a projected price-to-earnings ratio of approximately 16 times its estimated 2025 earnings. 

However, their scenario analysis suggests that EPS growth will remain stagnant over the next few years. 

By 2027, the company’s post-transformation price-to-earnings ratio is expected to be around 15 times, which aligns it with other large European consumer goods companies such as Unilever (LON:ULVR) and Danone (EPA:DANO). 

Despite this, Reckitt’s exposure to operational risks makes it a less compelling investment, according to Barclays.

The downgrade follows Reckitt’s decision to divest non-core assets, including Essential Home and Mead Johnson Nutrition, which account for about 25% of its EBITDA. 

While the restructuring is aimed at creating a more streamlined and efficient company, Barclays analysts caution that the move will likely dilute earnings. 

Their projections indicate that post-transformation 2027 EPS could be around £3.50, compared to the current status quo estimate of £4.10—a drop of about 15%.

Despite these concerns, Barclays acknowledged Reckitt’s management team as the strongest it has had in over a decade, led by CEO Kris Licht and CFO Shannon Eisenhardt. 

The analysts also noted that Reckitt’s commitment to returning excess proceeds to shareholders reflects a focus on investor value. 

However, they remain cautious about the company’s ability to execute the transformation smoothly, particularly as it involves dismantling its category-led global business unit structure and establishing new regional functions.

Barclays also flagged potential external pressures on Reckitt’s financial performance, including U.S. tariffs, which could negatively impact gross margins by 150 basis points. 

Meanwhile, litigation related to infant formula products in the U.S. remains an overhang, with potential settlements expected in late 2025 or early 2026.

The brokerage lowered its price target for Reckitt Benckiser’s shares by 3%, from 5,530 pence to 5,360 pence, reflecting concerns over EPS dilution and ongoing operational challenges. 

While they acknowledge the possibility of further portfolio changes that could provide upside potential, Barclays sees the overall risk-reward balance as neutral in the near term.

Shares of the consumer goods company were down 1.2% at 09:00 ET (14:00 GMT).