FTSE 100

Can the Reckitt Benckiser share price recover after its recent slump?

Does Reckitt Benckiser Group Plc (LON: RKT) have the capacity to return to previous share price levels?

The Reckitt Benckiser (LON: RKT) share price has fallen by 16% in the past six months. Over the same period, the FTSE 100 index (INDEXFTSE: UKX) is up by around 4%.

The company’s 20 percentage point underperformance of the index could be due to a relatively disappointing set of first-half results. They showed a near-10% decline in adjusted operating profit, as the company suffered from weaker demand for some of its brands.

Perhaps more worryingly, though, was the impact of inflation on its costs. As a result, the firm expects a 40-90 basis point reduction in adjusted operating margin for the current financial year.

Furthermore, the trend towards higher inflation could worsen in the short run due to the effects of a post-pandemic economic reopening. Indeed, supply chain disruption and rising energy prices may squeeze consumer demand for higherpriced, branded products at the same as they hurt Reckitt Benckiser’s margins. This may lead to further share price volatility and uncertainty in the short run.

Long-term share price appeal?

Of course, the long-term prospects for Reckitt Benckiser’s share price may still be relatively attractive. Indeed, it has the potential to shift an increasing proportion of its sales to online channels. This may support margins, while allowing it to generate stronger relationships with end consumers.

In addition, the company’s focus on emerging markets may pay off. Emerging economies such as India are growing rapidly and are expected to continue this trend over the long run. Furthermore, greater innovation has the potential to strengthen the firm’s product pipeline and build on its competitive position.

Meanwhile, the reopening of the world economy post-Covid could lead to a greater prevalence of colds and influenza. This may increase demand for Reckitt Benckiser’s products, as was the case in the early part of the Covid-19 pandemic. Moreover, central banks remain of the view that higher rates of inflation will prove to be a temporary phenomenon. This could even mean that pressure on the firm’s margins is itself a transient situation.

Valuation of Reckitt Benckiser’s shares

Even after its underperformance of the FTSE 100 index, the Reckitt Benckiser share price continues to command a relatively high valuation. It trades on a forward price-earnings ratio of around 18 using next year’s forecast earnings per share figure.

However, it has previously traded on significantly higher ratings. With what appears to be a sound foundation for growth and a sensible strategy, it could offer recovery potential over the long run – albeit with heightened volatility likely in the short term.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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