Analyst Note| Philip Gorham, CFA, FRM |
Reckitt missed our forecasts at the gross margin in the first half of 2021 due to rising commodity costs. Given the continuing spikes in raw materials in recent months, it is unlikely to be the last company to do so this reporting season. With inflationary pressures currently greater than Reckitt’s ability to raise prices, we expect the gross margin to continue to be weak in the short term, with further margin degredation in the second half of the year. However, the market sell-off of the stock is an overreaction, in our view, and we do not believe this report wipes 8% off the intrinsic value of the stock. In fact, we believe Reckitt is better positioned than most to pass through the cost inflation to consumers, with parts of the consumer health and formula businesses holding fairly strong pricing power. Nevertheless, we are lowering our gross margin estimates for this year and next, and we are cutting our fair value estimate to GBX 6,500 per share from GBX 6,800 to reflect the short-term margin squeeze. We think the sell-off has created a somewhat attractive entry point.