Additional precautions regarding our health and hygiene are essential to help curtail the coronavirus. Few companies are better placed to capitalise on this than the consumer goods company Reckitt Benckiser (LSE:RB). Investors seem to agree as the share price soared to a three-year high this week.
Share price rise
On 12 March the Reckitt Benckiser share price was 5,150p. This was a multi-year low as the price plummeted with the rest of the FTSE 100 due to the potential impact of the coronavirus. Since this time the share price has soared more than 50% to approximately 7,900p. In the same time, the FTSE 100 has only recovered about 17% of its value.
This share price rise has been supported by impressive half-year results. Both revenues and profits have risen as consumers increased their spending on hygiene and health products. Operating profit in the first half of the year was an impressive 20%.
Increased demand
Hygiene products are responsible for 40% of Reckitt Benckiser’s revenue. Within this sector demand for the popular disinfect brand Dettol grew approximately 62%. I think the coronavirus has changed our attitude towards hygiene. I foresee a long-term increase in demand for its products.
The remaining business focuses on health products. Panic buying of its popular products, such as Nurofen and Gaviscon, contributed towards growth in this sector. Spending on health products increases in the winter months, so its revenue in the second half of the year should be strong.
Both parts of the business are growing. I see no reason why the share price rise shouldn’t continue.
Pricing power
I am a big fan of consumer goods companies. Regardless of the strength of the economy, consumers will purchase their favourite branded products. This loyalty means consumers are happy to pay a premium to own them.
Reckitt Benckiser’s brands are very mature and growing revenue to increase shareholder returns has previously been challenging. In the past, revenues have been boosted by company acquisition rather than growth. However, this isn’t always successful and can take a long time to pay off. The acquisition of baby formula specialist Mead Johnson is a perfect example of this.
The current forecast for the financial year is to achieve high single-digit growth. However, I believe double-digit growth is more than achievable due to the high demand for its hygiene products in particular. Exceeding these targets will ensure its share price rises further.
Good value
A popular metric to assess the value of a business is to use the price-to-earnings ratio. The current forward price-to-earnings ratio of Reckitt Benckiser is about 24. This is well above the FTSE 100 average of 14. However, I am not concerned. Growing companies have a higher ratio as investors drive up the share price, believing it will make more profit in the future.Â
I believe the Reckitt Benckiser is fairly valued. Its established brands, range of products and pricing power should ensure growth is sustainable and profitable. Health and hygiene is a growing market and the company are well placed to benefit. In conclusion, I see no reason why the share price should not continue to rise.