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Gone with a bang?

Created:
26 February 2008
Written by:
Nathalie Olof-Ors

Reckitt Benckiser certainly washes whiter than white for its shareholders. Since its merger the merger of Reckitt & Colman with Benckiser in 1999, the share price has risen six-fold on the back of the enlarged group's brand-focused growth strategy.

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During this period, the owner of Cillit Bang kitchen cleaner and Vanish stain remover has consistently delivered superior sales and earnings growth through its focus on 18 'power brands,' supported by heavy marketing spend and constant innovation. What's more, Reckitt has been unmatched in its ability to continuously cut costs from its already streamlined operations.

This year, the strategy has paid off again and Reckitt released its best results this decade. However chief executive Bart Brecht cautioned that earnings growth should be closer to its historic average in 2008, and targeted growth of 6 to 7 per cent. Most analysts nonetheless remained bullish on the share and gave credit to the management for setting conservative yet achievable goals. And arguably, growth remains healthy enough compared with the rest of the sector. But whether or not this will prove sufficient to justify the share's bumper rating is another matter. Indeed, Reckitt's shares look very vulnerable to any trading disappointments.

Bear markets can be treacherous for the best performers in the household products and personal care sector as L'Oreal's misfortunes during the last bear market illustrate. Back in 2000, investors flocked to this manufacturer of shampoos and lipsticks which was then considered one of the most defensive investment stories among European large caps. The group had earned its reputation as a safe-haven investment by delivering double-digit EPS growth for 17 consecutive years. And although a tiny minority of analysts questioned L'Oreal's ability to maintain this growth rate, the vast majority remained bullish, placing a high degree of confidence in the management flawless track record. And analysts were finding growth drivers for the French company, notably through its expansion in emerging markets, to justify a multiple well above the historic average for the sector, .

But the things went horribly wrong for the shares' backers when EPS growth modestly decelerated,. L'Oreal became one of the worst performers of the CAC40 for almost three consecutive years, despite the group never reporting a loss and continuing to pay a generous dividend to its shareholders.

Of course, two investment stories never unfold in the same way, and Reckitt's fantastic run may well continue. The group is successfully diversifying into over-the-counter medicines which should help boost EPS growth. But this expansion will need to deliver to make sure that the shares hold on to the gains of the past eight years and they do not disappear with a bang.

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