Back to form

The negative reaction to recent results from consumer products giant Reckitt Benckiser (LSE: RB) could be an excellent opportunity for new investors to begin building a position in the company.

The £41bn cap returned to form in Q4, registering 2% growth in like-for-like net revenue following a strong flu season — not bad considering the company’s reference to trading in a “challenging, volatile environment“.

Elsewhere, the acquisition of Mead Johnson remains “firmly on track“, according to CEO Rakesh Kapoor. In addition to revealing that $25m of synergies had been achieved earlier than expected, Reckitt also raised its forecast for cost savings to around $300m — up to $50m higher than that predicted when the former was purchased. Looking ahead, two new units — Health and Hygiene Home — are also expected to “drive long-term growth” and help the company “leverage the structural shift” it is witnessing in the way people shop. So why have the shares dipped?

It seems that some investors became skittish as a result of profit coming in below the level expected by analysts and like-for-like growth looking more subdued going forward. The fact that the company remained tight-lipped on the possibility that it may bid for Pfizer’s consumer healthcare arm could be another factor. Hardly the stuff of nightmares though.

Thanks to its portfolio of ‘sticky’ brands and huge free cash flow, Reckitt remains a solid long-term pick in my opinion. While a forecast price-to-earnings (P/E) ratio of 17 for the current year might not scream value, it’s worth remembering that stock in consumer goods titans — with their defensive qualities — rarely comes cheap.

The consistent hikes to dividends shouldn’t be overlooked either. The total payout for 2017 was 7% higher than that returned to shareholders a year earlier. The fact that this year’s dividend (a forecast 173.5p per share) looks decently covered by profits is another bonus, particularly as some income stalwarts appear to be on shaky ground at the current time.

Drink up

Reckitt isn’t the only quality company whose share price has taken a hit in recent times. Somewhat unfairly, beverage giant Diageo (LSE: DGE) has seen its stock dip 10% since hitting fresh highs at the end of last year.

In January, the blue-chip reported a 1.7% increase in sales and 6.1% in operating profit over the first half of the current financial year, despite organic growth being held back by adverse exchange rates. Trading in Europe and Latin America was particularly robust and helped offset weakness in other markets, including India (where a new ban on alcohol being sold near state highways was introduced) and Korea.

Having already warned that growth in the 2017/18 financial year would be weighted to the second half, the company stated that it remains “confident” on being able to achieve consistent mid-single-digit rises in revenue going forward. That’s good enough for me. 

Changing hands for 21 times forecast earnings, Diageo’s stock isn’t cheap. Nevertheless, I continue to believe that the world’s largest spirits company’s status as a classic ‘bottom drawer’ stock remains undiminished.

The post 2 FTSE 100 stocks I’d buy right now appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Reckitt Benckiser. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This lean business model has allowed it to undercut the competition by a devilish amount. Usually, when estate agents helps sell your property they will take a percentage fee. Purplebricks has discarded this approach in favour of a flat rate for any property, regardless of value. For only £849, the seller gets a local agent, listings on all major websites like Rightmove and access to one of the UK’s largest databases of buyers.

Its competitive advantage stems from its ‘first mover’ status, but I’m not sure it is durable. You see, a lot of companies that create superior processes go on to earn superior returns. Inevitably, these outsized returns attract competitors to the industry, driving down profitability for everyone involved.

Have you heard of Hatched, House Simple, House Network, My Online Estate Agent, Settled, Tipilo or Yopa? 

Well, if you’re an investor in Purplebricks you probably should have done, because according to Which? they all provide similar services. Here’s the comparison page.

Oh, and that last one, Yopa, was launched by upmarket estate agent Savills. If you thought the industry would just lie down and die, you were wrong. I don’t enjoy deterring investors from genuinely interesting and useful businesses, but I worry that this business model is not patentable or protectable.

The company’s best chance at domination, however, is the network effect. This describes any network that becomes more valuable as more people join it. Purplebricks’ network of buyers using the app could represent a durable advantage if it can reach critical mass before competitors do. But it must do this before a rival with financial firepower turns up and makes this a harder race.


If the network falls behind that of competitors, the brand will not protect sales and I believe Purplebricks will experience an incredible hotting-up of competition in the future. At the end of the day, people will flock to the platform that has the most economic benefits.

Brands are overrated

Sky (LSE: SKY) is a good example of this in another sector. The internet has opened up the television industry to a myriad of new competitors, not least among them Amazon Video and Netflix. The battle for content is hotting up – and that means Sky will likely have to spend more to keep its services appealing to its customers.

The company has long relied on expensive sports rights to drive business, but these rights are up for auction every few years, meaning the future is hard to predict. Competitor BT secured the Champions League rights back in March, but it cost it £1.18bn – nearly £300m more than it paid last time around. This spending only lasts until 2021, when the bidding begins anew and Sky faces the same issue. 

Sky’s churn rate increased more than a full percent last year from 10.2% to 11.6%. Admittedly this is still a very low rate, but I believe it to be symptomatic of younger generations avoiding costly bundled deals offered in favour of all-inclusive offerings from Netflix at less than £10 a month.

I reckon Sky will flourish for some time yet, but it must evolve if it wants to stay relevant in the long term.  

The post These two “competitive advantages” could be about to crumble appeared first on The Twelfth Magpie.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.