Reckitt Benckiser Group (LSE: RB) suffered a disappointing third quarter, falling short of sales and revenue expectations.
Management has now trimmed its full-year revenue growth targets to the lower end of its 4% to 5% range, and is keener than ever to offload the struggling Reckitt Benckiser Pharmaceuticals, following its 9% drop in revenues.
The statement put the brakes on Reckitt’s recent solid share price performance. It also bodes ill for household goods rival Unilever (LSE: ULVR) (NYSE: UL.US).
Reckitt Ralph
UK-based investors have seen both companies as a great way to tap into faster growing emerging markets, but as Reckitt’s results show, many regions have been struggling lately.
Weak markets in south-east Asia and Latin America hit its revenues, and the company is also exposed to sanctions-hit Russia.
The US also underperformed after experiencing “a tough year” in 2014.
Sterling’s recovery has proved another headwind, denting profits after they have been converted into pounds and pence.
All these problems are likely to surface at Unilever.
Trouble Ahead
In fact, they have already. In July, management complained that it was being hampered by the “further slow-down in the emerging countries whilst developed markets are not yet picking up”.
Troubles in Russia, China and Latin America all hit revenues, as has a stronger sterling. None of these trends have gone into reverse.
Low wage growth in the West, and the wider deflationary trend, will also hit sales and pricing at both companies. Consumers are hurting, and Reckitt Benckiser and Unilever will feel their pain.
Solid At The Back
Both companies have nonetheless lived up to their billing as defensive holds during the recent turbulence.
While the FTSE 100 is down 5% over the past year, Reckitt Benckiser grew nearly 6%, and Unilever returned 2%.
The downside of this is that they are expensive, with valuations way above the current FTSE 100 average of 13 times earnings.
Reckitt currently trades at a whopping 20 times earnings, while Unilever isn’t far behind at nearly 19 times earnings.Â
And while the FTSE 100 average yield has topped 3.6% following recent share price falls, Reckitt gives you a relatively lowly 2.75%. That is another blow to the investment case, along with the high price.
Unilever is slightly more tempting, yielding 3.63%.
You pay a high price for defensive solidity in days like these. Now I just wonder where the growth is coming from.