Reckitt’s Muted Performance in 2023 Will Likely Be Price Paid for Stellar 2022

Wide-moat Reckitt RKT reported stronger-than-expected full-year 2022 results, with net revenue of almost GBP 14.5 billion and an adjusted operating margin of 23.8% (compared with GBP 14.3 billion and 23.3% in our forecast, respectively). We reconfirm our GBX 6,700 fair value estimate, as this slight overdelivery—mainly driven by an acceleration of pricing actions in the fourth quarter—has a limited impact on our valuation and our largely unchanged long-term forecast. Our U.S. dollar share class declines to $16.20 from $16.80 on a weaker British pound. At current levels, the stock is slightly undervalued, amid the uncertainty around the absence of a permanent CEO.

Adjusted operating margin was up 90 basis points compared with a year earlier, a rare feat in the consumer segment in a year of extraordinary cost inflation. However, around 80 basis points of this improvement can be attributed to the tailwind in the U.S. infant formula market, where Reckitt stepped in to compensate for the gap in supply as narrow-moat Abbott shut down its Michigan factory amid contamination concerns. Selling larger volumes outside of its WIC contracts (the special supplemental nutrition program for women, infants, and children) brought the benefit of fewer rebates and higher margins. Although we forecast this benefit to largely reverse in 2023, we believe Reckitt should be able to hold on to a fraction of the additional market share gained in the more profitable non-WIC segment. Therefore, we only expect the group’s adjusted operating margin to decline by 50 basis points in 2023 as market conditions normalize.