Reckitt boosted by upbeat margin guidance, Moneysupermarket can’t help where it’s really needed, and Russian tensions return as FTSE starts lower

“A good business wants to sell more products each year than the previous 12 months. Success is a sign that either existing customers want more of their goods, they’ve attracted new customers, or a mixture of both,” says Danni Hewson, Financial Analyst at AJ Bell.

“Reckitt Benckiser has followed Unilever’s lead by reporting higher like-for-like revenue but like its consumer products peer that’s mostly a result of pushing up prices rather than greater sales volumes.

“In this inflationary environment, as many companies are raising their prices consumers are getting used to paying more for everything that goes in their basket. That makes the top line performance look impressive for companies like Reckitt, but the underlying numbers may paint a different picture.

“Reckitt has reported a drop in net revenue, but its cost of sales has remained the same which means gross profit is down. There is also no growth in the full-year dividend, which investors may find disappointing.

“So why has its share price risen on these numbers? It’s all down to confidence in growing margins despite inflationary pressures, the opposite of Unilever which has guided for margins to fall near term.

“Big brand owners are facing an important test given pressures on the cost of living. Consumers may not be able to keep stomaching price increases and so there is a risk they buy less of the popular and more expensive brands and/or trade down to cheaper options. The big brand companies therefore face the risk of having to cut their prices just to maintain sales volumes.

“Part of the expected margin boost for Reckitt comes from a likely shift in the type of products being sold in its health arm. During the pandemic, people stuck at home haven’t caught as many colds or flu-liked illness because they haven’t been mixing in public as much. But now life is getting back to normal, Reckitt is likely to see stronger sales of higher-margins products to help fight colds and flu.

“There is also the theory that many people think the big brand products in healthcare are more effective at fighting illnesses, despite them having the same active ingredients as supermarket own-brand versions. So, we could potentially see less trading down in the healthcare space compared to the food and drink categories sold by Unilever.”

Moneysupermarket

“Comparison site Moneysupermarket is in a tricky spot. In theory its services should be in higher demand than ever as consumers battle a cost of living crisis. There’s never been more incentive to pursue cheaper household bills.

“However, just when its services are most acutely needed the company is bereft of deals in the key area of energy because soaring wholesale prices mean suppliers aren’t offering any cheap tariffs at all.

“The company is expecting zero revenue from its energy business in 2022 – an indication that it sees little let up in the pressure on Britons’ heating and electricity bills in the short term.

“At least the travel business is picking up as Covid restrictions are eased and the insurance and money categories are seen as being in a relatively decent place too.

“If households can’t save money on energy there is at least a prospect that they will turn to Moneysupermarket to pursue cheaper deals on broadband, loans as well as credit cards and insurance.

“However, in a rising interest rate environment cheap deals on financial products are likely to be less prevalent.

“Moneysupermarket needs to focus on the things it can control, protecting its share of a competitive market with smart marketing spend and delivering innovation which makes customers’ lives easier through areas like automated switching.

“The company’s decision to lift the dividend despite moving from a net cash to a net debt position year-on-year at least reflects some confidence in a brighter future in the medium term.”

Markets

“The FTSE 100 was lower on Thursday as reports of attacks in Ukraine helped inflame tensions which many thought had been doused by talk of Russian withdrawals earlier in the week.

“Hopes a deal between the West and Iran could be salvaged put pressure on oil prices and saw index heavyweights BP and Shell fall.

“While Standard Chartered, something of an outlier among the UK banks given its emerging markets focus and a very limited footprint in Britain, got the sector’s reporting season off to a weak start with profit below expectations.

“Strong results from Swiss food group Nestle showed it’s not impossible for consumer goods firms to prosper in the current environment. While inevitably there was some impact from rising input costs, if your proposition is sharp enough and you run an efficient enough operation these can be mitigated, at least to an extent.”

These articles are for information purposes only and are not a personal recommendation or advice.