Today I'm going to take a look at Unilever Plc (UL), the London based consumer products conglomerate. It's stock has sold off sharply in recent weeks, even after delivering decent quarterly earnings. Unilever is truly a global company, which sells everything from hygiene products to food, all around the world. The fact that Unilever Plc has been in business since 1895 is one heck of an endorsement, but how does the operating business look today.
Unilever offers a host of brands including Axe deodorant, Ben & Jerry's ice cream, St. Ives Lotions, Lipton teas and Bertolli pastas. At first glance the company looks expensive, currently selling with a price-to-earnings (P/E) ratio of around 18 and a price-to-book (P/B) ratio of about 6.65. These metrics look high, although less expensive than some comparable U.S.-based companies, but let's see what you're getting for your money.
One of my favorite metrics is return on equity (ROE). I want to be sure that the companies I own generate a high rate of return on my equity ownership in the company. You can see the past 10 years of ROE for Unilever Plc.
These results look pretty good with the ROE trend line staying pretty flat, even though the last couple years have been below that trend. I generally like to see ROEs of 20% or more and Unilever has been consistently above that for the past 10 years. Next, I want to look at Unilever's past revenue growth per share, to see if it has demonstrated “top line” growth. Below you can see the revenue growth per share over the past 10 years.
Okay, good, so Unilever has been able to consistently grow its revenue per share over the past seven or eight years. Other than a couple of large spikes in the late 1990s and early 2000s the revenue per share has been growing steadily since at least the mid 1990s. Thinking back to similar U.S.-based companies I've recently reviewed, Unilever's revenue growth rate seems to be slower than their U.S. rivals, which may help explain Unilever's lower valuation than some of the U.S.-based rivals. Now let's take a closer look at the earnings-per-share (EPS) and free-cash-flow per share (FCF) growth.
From the left side of the table above it's clear that the EPS and FCF have been growing at different rates, while each has been jumping around a fair bit. These erratic EPS and FCF results again reinforce why some investors would value Unilever at lower rates than Proctor & Gamble or General Mills. Also in the table above is my discount cash flow analysis of Unilever's valuation. Based on the historic (10 year) growth rate (assumed to be the slower of EPS and FCF) of 8.6%, this method of valuation suggests that Unilever's common stock is undervalued valued.
Based on this valuation Unilever's future earnings (minus net debt) have a valuation of nearly $56, which is about 44% below yesterday's closing stock price of $39.15. In the past 10 years the dividend have tripled. The current dividend yield is 3.6%. There may not be much room for future dividend increases, because the current dividend payout ratio is about 60%.
In summary, Unilever Plc seems undervalued. I prefer to buy investments in companies that appear at least 30% undervalued, and Unilever fits that requirement. I expect the future earnings growth may slow slightly, but really like Unilever's exposure to the emerging markets. Of course this is my opinion. Do your own investigation to be sure Unilever fits your financial needs. You also need to ask yourself if a company as large as Unilever has room to increase its profit margins or grow sales meaningfully.
Disclosure: I will likely buy Unilever Plc (UL) in the next 24 hours. I am long GIS and PG. This analysis is for informational purposes only and should not be considered a recommendation to buy, sell, or hold any equities. I am not a financial professional. The information above is provided by GuruFocus.com and Yahoo Finance.