Amid the turmoil, just about every City pundit has advised shifting into defensive assets as a shelter from volatility. The only problem with this strategy is that it has become a victim of its own success; valuations of many safe-haven stocks have now become vulnerable.
Reckitt Benckiser (RB.), tipped as a BUY by ING
Take Reckitt Benckiser. It is a world leader in household cleaning; its 18 “power” brands include Nurofen, Strepsils, Harpic, Dettol and Lemsip.
The company is a solid business, but its shares are overvalued, especially as there are some strong headwinds affecting the sector. Raw material and energy prices are soaring, forcing Reckitt to hike selling prices to protect bumper operating profit margins of more than 22%. In boom periods, companies can get away with charging a premium as people trade-up to buy expensive goods. But in more frugal times, even leading brands suffer as cash-strapped consumers choose cheaper alternatives.
The competition is also getting tougher. Powerful retailers, such as Wal-Mart and Tesco, are demanding bigger discounts while also introducing their own competing brands. Rivals such as Unilever and Procter & Gamble are also upping the ante with the aim of knocking Reckitt off its pedestal.
The City is forecasting 2008 sales and earnings per share of £5.9bn and 141p respectively, rising to £6.4bn and 157p in 2009. The shares trade on toppy p/e ratios of 19.5 and 17.5. In light of the worsening macro-economic picture, I’d value the stock on a multiple of 14 times, or about £20 a share. I also think Reckitt has over-paid for its $2.3bn acquisition of Adams Respiratory Therapeutics, the US maker of cough medicines. The deal was struck on a multiple of over five times revenues.
Lastly, in a recent BBC Newsnight programme, it was alleged that the group had plotted under the codename “Project Eric” to create obstacles to block manufacturers from selling generic copies of its heartburn treatment, Gaviscon. Gaviscon came off patent ten years ago, but a generic version has never been made. It was claimed that such a drug could have saved the NHS up to £40m. A Commons’ health select committee is now expected to investigate, potentially tarnishing the group’s reputation.
In conclusion, while Reckitt is a quality business with a strong City following, it is also exposed to belt-tightening by hard-pressed shoppers and discounting by supermarkets. Given the risks, now looks an apt time to take profits. Take it from me as a value-conscious consumer, no stock is entirely recession-proof – whatever City experts claim.
Recommendation: TAKE PROFITS at £27.55
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments