Investment Column: Investors will clean up with Reckitt stock

Click to follow

Our view: Buy

Share price: 3187p (+53p)

Many of its products are associated with ailments or household chores, but the consumer products giant Reckitt Benckiser yesterday showed it is in rude health.

The maker of Nurofen painkillers and Finish dishwasher detergent delivered pre-tax profits up by 28 per cent to £1.9bn after a 17 per cent surge in the final quarter. In Europe, which accounts for 45 per cent of net revenue, Reckitt said that growth had largely come from its dishwashing, home care, and health and personal care units. Its total sales rose by 18 per cent to £7.75bn, which was supported by the group's 17 so-called powerbrands.

Perhaps, above all, it was Reckitt's cash generation in 2009 that shone, leaving it with net cash of £220m at the year-end, compared with net debt of £1.2bn a year ago. However, Bart Brecht, the chief executive, played down the possibility of it using the cash pile to make a major acquisition.

Investors will also have been cheered by a 19 per cent hike in its final dividend to 57p a share, bringing the total dividend for 2009 to 100p.

But the results did contain a few comments that cannot be easily erased by its Vanish stain remover.

It said that up to 80 per cent of its pharmaceutical arm's revenues and profits could be lost this year – and further erosion thereafter – following the launch of generic competitors to its methadone substitute, Suboxone.

Reckitt's pharmaceuticals division lost the rights to exclusively to sell Suboxone in the US in October, but the company is still waiting to see if any competitors emerge.

In 2009, US Suboxone delivered the bulk of the pharmaceutical division's adjusted operating profit of £371m, which was up 63 per cent. For the group, shares in Reckitt are also not cheap and trade on a forward 2010 price-earnings ratio of 15.6. But it remains one of the world's premier consumer goods companies and, in the long term, we believe its cash generation, growth potential and dividend policy makes its worth putting in an investment shopping basket. Buy

BHP Billiton

Our view: Buy

Share price: 1856.5p (-29p)

Six months ago, when everyone realised that the end of the world was not, in fact, nigh after the fallout of the financial crisis, mining stocks started to stage a dramatic recovery.

In fairness to them, the likes of BHP Billiton have long said that urbanisation in places like China will underpin longer term commodity prices. Investors also benefited in the short term as the huge stimulus packages around the world, and especially in China, propped up prices.

BHP, announcing its half-year results yesterday, did sound a note of caution. Maintaining its longer term projections, the group said that Chinese demand in the shorter term may not be as strong as others have suggested. "We do not expect China to stop lending," BHP said in a statement. "However, reduced credit liquidity in key segments of the commodity market may have a flow-on impact on prices."

At the same time, its chief executive, Marius Kloppers, highlighted China's roaring demand for iron ore, which has driven up spot prices.

Even if the company tried to dampen spirits a little, the watchers were having none of it, pointing out that the numbers were ahead of forecasts.

Anyone keen on the mining sector would do well to put their money into BHP – the group is about the most well diversified in terms of assets, while rising commodity prices should support its share price.

As a cautionary note, those that get nervous about big acquisitions should be aware that Mr Kloppers yesterday refused to rule out a bid a FTSE 100-listed BG Group. Nonetheless, buy.

Smurfit Kappa Group

Our view: Buy

Share price: €6.6 (+€0.07)

At first glance, Smurfit Kappa presents risks. The group – makers of paper-based packaging for companies like Tesco and Unilever – made a €52m pre-tax loss last year and suffered a 14 per cent slump in revenues.

This was largely caused by the drop in demand for consumer products during the downturn, along with a rise in the price of raw materials. Furthermore, Smurfit still has net debt of €3.05bn. However, the packaging company eased its financial pressures by raising €1bn via a bond issue in November, and it does not face a major refinancing of its debt until December 2013. The company, which operates in 30 countries, also saw a return to volume and pricing growth at the end of 2009. Overall, its shares – which trade on a 2010 price-earnings ratio of 7.6 times – appear to represent a bargain. If investors are feeling brave, now might be the time to buy.