Its hard to fault the performance of the two groups over the past century and their outperformance only reinforces the argument that Reckitt and Unilever are working for long-term growth. For example, Reckitt has existed in one form or another since the 1800s, while Unilever has been around in its current form since 1929.
And because of this long-term focus, the two companies are favourites of investment managers around the world. Indeed, Reckitt was aportfolio staple of respected fund manager, Neil Woodford for over a decade, but the respected fund manager recently closed-outhis position, citing the companys high valuation as the reason for selling.
Nevertheless, Woodford remains a fan of Reckitt and since selling has praised the companys management team, strong product line up and performanceduringthe past decade.Over the past ten years Reckitts shares have jumped 283%.
While Reckitt does look slightly expensive on its current valuation the company trades at a forward P/E of 19.6 the groups potential for growth really excites me.
Both Reckitt and Unilever are changing the direction of their businesses.
Reckitt for example isrepositioning itself as less of a household cleaning company and more as a health- and hygiene-products firm. This is a really attractive move for the company, as these products tend to have a more loyal customer following. Whats more, according to City analysts,hygiene-products generally have higher margins than Reckitts traditional cleaning products.
Meanwhile, Unilever is divesting non-core, low-margin food products and other consumer goods, in order to focus on cleaning products. Returns from food products have deteriorated during the past few years, due to rising costs and increasing competition. The sale of thesenon-core brands should widen Unilevers profit margins allowing it to generate more cash, pay down debt and acquire more profitable brands in line with the companys new strategy.
Unilevers recent non-core divestments include its meat snacks business, thePeperamibrand, theRaguandBertollipasta sauces brands and the companys USSlim Fastbrand.
Better balance sheet
Even though both Reckitt and Unilever are repositioning their businesses, Reckitt is the company that has the most potential for growth. You see, as Reckitt transforms itself to a higher margin business, the company will be able to generate more cash to support its already strong balance sheet. A stronger balance sheet will allow Reckitt to acquire additional brands for bolt-on growth.
For example, at the end of 2013 Unilever had a netgearing ratio of 62% and the company could cover its interest payments 14 times with earnings before interest and tax. Reckitt on the other hand had a netgearing ratio of 31%, interest payments were covered 77 times by earnings before interest and tax.
So overall, while Reckitt may look expensive at current levels, the companys potential for growth makes it look like a much better bet than Unilever.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.