In the past year, many consumer goods companies have struggled. Rampant cost inflation has cast a shadow over their profit outlooks. Among these I’d include Reckitt (LSE: RKT). Its shares have tumbled 5% over the past year while the FTSE 100 index has added 13% as I write.
I think the Reckitt share price could outperform the broader index in 2022. Here are three reasons why – as well as one reason it might not.
1. Profit margin maintenance
Rising input costs can hurt profit margins if manufacturers can’t pass them onto customers. That is where the pricing power of Reckitt’s premium brands portfolio comes into play. Consumers are willing to pay extra for brands such as Dettol compared to unbranded competitors. That allows Reckitt to pass on ingredient cost increases in the form of price rises to a certain extent.
In its third-quarter trading update, the company said that it expected to deliver on its previous adjusted operating profit margin guidance for the year. I take that as positive news and think it bodes well for continued profitability at the firm. At a time when some companies, such as rival Unilever, have blamed rising costs for a lower margin outlook, Reckitt’s apparent success in managing inflation could lead to a positive re-rating for the shares, in my opinion.
2. Forward focus
For several years, Reckitt has been plagued by concerns about the financial impact of its disastrous 2017 acquisition of an infant nutrition business.
I think that should weigh less on investors’ minds in 2022. Reckitt has largely exited its infant formula business in China, hanging on to only a small stake. It has also written down most of the cost of the original acquisition. I hope that means less management time will be spent on the business and it can move on financially. As the benefit of that becomes clearer, it could help boost the Reckitt share price.
3. Ongoing hygiene focus
With its raft of hygiene brands, it saw surging demand during the pandemic. If it can parlay that into longer-term growth for disinfectant and cleaning brands, it could benefit both revenues and profits at the company.
I see reasons that can happen. Like-for-like sales in its hygiene business were 13% higher in the first nine months of its financial year than the equivalent period last year. Given that last year had already seen a surge in hygiene sales, the continued growth indicates a possible structural shift in customer habits. That could be lucrative for Reckitt – and help support share price growth in 2022.
Risks for the shares
Although I see a number of positive drivers for Reckitt shares next year, it could be that things turn out less positively.
One risk that worries me is management quality. The infant formula acquisition was fairly recent and has destroyed a lot of value for Reckitt shareholders. While the chief executive has changed since then, many of today’s senior managers have been in the business since before the acquisition. I am concerned that the company could make similarly misguided forays in future. If it does, that could be negative for the shares.