When I think of household goods giant Reckitt Benckiser Group (LSE: RB) and aero-engine maker Rolls-Royce Group (LSE: RR), I’m reminded of Aesop’s fable of the tortoise and the hare.
A very modern fable
Reckitt Benckiser is of course the tortoise. It doesn’t pretend to be better than it is. It just gets its head down and plods away selling humdrum items such as washing powder, cleaning products, headache pills, air fresheners and throat sweets, which sell in more than 200 countries around the world. I’ve got a sore throat, and right now I’m sucking Strepsils.
Rolls-Royce, naturally, is the hare. Aerospace is the last frontier of British engineering, the last area in which we excel. Plus it has all the inherited cachet of that name. I can still remember the “gasps” and “oohs” when a legendary Rolls-Royce Silver Shadow drove down our street as a boy in the mid-1970s. Rolls-Royce, back then, was glamour. Its name said wealth, style, power, success. I may have Cillit Bang in my kitchen and Harpic in my bathroom, but I knew even then that I would never have a Roller on my driveway.
Low Roller
Now we all know that the tortoise won the race because the big-headed hare thought he had time for a nap. Similarly, management arrogance towards City analysts and aggressive accounting methods helped drive Rolls-Royce’s recent reversals, although a collapse in the defence and marine engine markets were also at fault. Pride still comes before a fall, just as it did in Aesop’s day.Â
When chief executive Warren East took over in July last year, he found Rolls-Royce shrouded in what he called “accountancy fog“. It was inefficient, bureaucratic and arrogant. He also inherited a bribery scandal. The company has now issued five profit warnings in three years, slashed its dividend by half in February, and remains a target for US activist investors. The stock is down 48% in that time. East still has a massive job preventing Rolls-Royce from going south. Earlier this month, S&P Global Ratings cut its credit rating over concerns on profitability and cash flow. Earnings per share (EPS) are forecast to drop 58% this year. Frankly, it looks a bit hare-y.
More Cillit Bang for your buck
At least the company has now woken up to how badly it’s trailing. 2017 EPS look more promising with forecast growth of 36%, and a yield of 2.4% by year-end. Rolls-Royce may be a shadow of itself, but trading at 10.5 times earnings, now could be a good time for long-term investors to bet on its recovery.
Contrast that to the steady ride investors in Reckitt Benckiser have enjoyed. The stock is up 108% over five years, 46% over three years and 16% over one year, barely pausing for breath. The only downside is that it now trades at an expensive 26 times earnings. But that’s the price you have to pay for a company that has concentrated on putting one foot in front of the other to great effect. As so often happens in investing, slow and steady wins the race.