Morgan Stanley optimistic on Reckitt Benckiser despite valuation

25th Sep 2014 14:54

The risk-reward trade-off inherent in holding shares of consumer goods giant Reckitt Benckiser is tilted to the upside, in the opinion of analysts at Morgan Stanley, given the company's strategic optionality.More specifically, the firm is targeting a shift in its portfolio towards higher growth and margin business in consumer health. As well, its valuation is underpinned by what should remain "solid operational performance" in the core business, the broker argues.Thus, under its bull case – which integrates a marked change in the portfolio – the stock could reach 6,400p, despite already finding itself at the upper end of absolute and historical ranges.Its consumer health division should continue to be one of the best growth stories across the European staples sector, with on-going growth in line with the average for the last three years of 8%. Near-term momentum should be supported by easier comparables and a strong innovation line up.The company is also expected to become a consolidator in the sector, which in turn should translate into a positive mix on the rate of sales growth and its margin profile.Under a "bear" case of slowing core momentum together with lower possibilities of deals in that area then the stock would fall to 4,600p.Once taken into account all of the above Morgan Stanley upped its price target on the stock to 5,600p from 5,100p previously while maintaining is recommendation at "equal-weight".