U.S. Baby Formula Crisis Is a One-Time Boon for Narrow-Moat Reckitt; Shares Fairly Valued

With the ongoing U.S. baby formula supply shortage handing wide-moat Reckitt a one-time windfall, we lift our fair value estimate by 8% to GBX 6,700. Stronger performance of the consumer health segment in early 2022 than we’d previously credited and the recent strength of the U.S. dollar also contribute to the upgraded valuation. Dramatic shortages in U.S. infant formula in recent months--following disruption of supply from narrow-moat Abbott--have led to Reckitt markedly ramping-up Stateside production, as well as securing a temporary permit from the Food and Drug Administration (FDA) for the importation of baby formula into the United States. Investors cheered Reckitt’s strong first-half result, driving the stock price decidedly higher. Nonetheless, we view the wide-moat stock as fairly valued relative to our upwardly revised fair value estimate.