* A well-loved stock with two bull angles
RB is a very well-loved stock. Leaving optimism on near-term trading prospects aside, as we see it there are two main strands to the bull case: (i) RB gets acquired for its consumer healthcare business & (ii) it further morphs into a consumer healthcare play. In this note we explore each of these bull angles.
* A bid is already more than reflected in the valuation
While we view it as unlikely, we concede that it is not impossible that RB falls prey to a bid from either pharma or consumer majors. However to our mind this is more than in the price. Applying 21x CY15e EBITDA to Health (the take-out multiple for hotly contested Merck consumer healthcare), the remainder of Reckitt reverses out at c.15x (a material premium to Beiersdorf, Colgate, Estee Lauder and L’Oreal). In addition, let us not forget that RB has been so efficiently run that any acquisition synergies are likely to be somewhat offset by reinvestment to align the
business to acquirer practices. Finally, let us not forget the unique RB culture.
* Acquisitions will necessitate lowering the quality bar and raising the price bar
Picking up the other bull angle, while there are acquisition options for RB, quality assets are now few and far between (indeed, there are possibly no material quality assets available for sale). To acquire, RB will very likely have to lower its quality bar and raise its price bar.
* Yes near-term Health trading will be solid, but challenges lie ahead
That a good flu season is upon us is no secret, but challenges lie ahead: Mucinex generics, Nexium across Europe, Perrigo entering Europe.
* We get the story, but to us it feels more than in the price
c.25x CY15e P/E for a business with c.7-8% momentum earnings growth and to which the market sentiment is overwhelmingly positive. We reiterate our Underperform rating.