Falling inflation and rate cuts should drive the share price for this consumer goods giant

Reckitt’s stock market performance has been a big disappointment since our recommendation but a recovery looks imminent ‘The business is targeting mid-single digit annual revenue growth over the coming years’

Consumer goods companies have had a rotten couple of years. Rampant inflation has prompted rapidly rising interest rates that have been detrimental to global economic growth. These factors have contributed to a cost of living crisis that has dampened demand for a range of discretionary items and caused many consumers to trade down to cheaper substitutes among staple goods.

This has prompted several global consumer goods companies to report lower than expected sales and profits over recent months. While in many cases they had previously been viewed as defensive stocks capable of riding out even the toughest economic conditions, they have ultimately struggled to cope with the significant pressure placed on disposable incomes across vast swathes of the world economy.

In such an environment, it is not surprising that global consumer goods company Reckitt Benckiser has produced a thoroughly disappointing share price performance since we tipped it in March 2021. The company, which makes well-known brands such as Nurofen, Gaviscon and Finish, has recorded a share price decline of 11pc and lagged the FTSE 100 by 26 percentage points.

Now, though, it faces an increasingly upbeat operating outlook. Inflation is within touching distance of central bank targets in several developed markets and interest rates should start to fall over the coming months.

As the cost of living crisis finally ends, demand for the company’s products is likely to increase. And, since a third of its sales come from developing markets that, according to the IMF, will expand by 4pc this year against less than half that figure in developed markets, its bottom line growth potential is encouraging.

It will navigate this more favourable period with a new chief executive, Kris Licht, at the helm. He announced a £1bn share buyback programme alongside the company’s third-quarter trading statement in October; a well timed move, in Questor’s view, following its share price decline. Reckitt now trades at around 16 times forecast earnings. While this is by no means cheap when compared with numerous bargain-basement FTSE 100 stocks, it is nevertheless attractive in view of the company’s long-term growth prospects.

Indeed, the business is targeting mid-single digit annual revenue growth over the coming years. It expects a variety of productivity initiatives to bolster profit margins so that its bottom line grows at a faster pace than its top line. And with a portfolio of brands that command strong customer loyalty, it is well placed to deliver on its growth aims. Recent trading performance has been mixed. Although it produced like-for-like net revenue growth of 3.4pc in the third quarter, its nutrition segment acted as a drag on overall performance. That division recorded a fall in net revenue of 11.9pc because supply problems at a rival company had increased demand for its products in the same quarter of the previous year.

Volumes across all three of the company’s segments, which comprise health and hygiene alongside nutrition, suffered in its most recent quarter as consumers traded down to cheaper options amid substantial price rises designed to lessen the impact of higher costs on profitability. While this trend could persist in the near term, it is likely to dissipate as disposable incomes rise amid an improving economic outlook and as inflation continues to decline.

An improving operating outlook is not the only potential catalyst for the share price. Reckitt’s half-year results showed that product innovations, which centre on new products being released under existing brands, are contributing to market share gains. E-commerce sales, which account for just 14pc of total revenue, represent a further long-term growth area. And with debts at 83pc of assets and interest costs covered more than 15 times by profits in the first half of the year, the company has a sufficiently sound financial position through which to invest heavily for future growth.

While Reckitt’s share price performance has been disappointing since our original tip, it has clear recovery potential. The company is well placed to benefit, alongside many rivals, from a better operating environment. With an attractive stable of brands, an undemanding valuation and catalysts such as product innovation, productivity improvements and e-commerce growth, it remains a worthwhile long-term purchase. Keep buying.