Unilever Worth Looking At

Published in Company Comment on 3 February 2011

The consumer goods group is on an attractive discount to its peers.

Consumer goods giant Unilever (LSE: ULVR) reported sales ahead of consensus forecasts when it announced its results for the fourth quarter and full year on Thursday.

The owner of a stable of top brands, including Knorr foods, Cif cleaning products and Dove soap, described its 2010 performance as "strong despite intense competition, weak consumer confidence in many markets and the impact of rising commodities."

Numbers and outlook

Turnover for the year was up 11% to €44.3bn, although much of the headline growth came from favourable currency movements. Underlying sales grew 4%.

Operating profit was up 26% and bottom-line profit likewise rose 26%, to €4.6bn. Basic earnings per share were up 25% to €1.51.

Underlying operating margin for the year edged up 0.2% to 15%, but in the fourth quarter was down 0.2%, mainly due to the impact of increased commodity costs.

Rising commodity costs have become a growing theme for consumer goods companies, and have already been highlighted this year by US firms Colgate Palmolive and the mighty Procter & Gamble. (The latter was recently reviewed by my Foolish colleague Tony Luckett.)

Many analysts and commentators are expecting input cost inflation to rise even more dramatically in 2011, and the share prices of the likes of Unilever, Reckitt Benckiser (LSE: RB) and their US and European peers have underperformed their wider markets by some margin over the past year.

However, Unilever itself is relatively sanguine about commodity inflation. Chief financial officer Jean-Marc Huet, speaking on FT Alphaville 'Markets Live' said:

"With all the data points at my hand today, the situation is definitely less serious than 2008 … [though] let's not be naive, does remain volatile and uncertain, and while we have a good view on the first six months of the year, we will need to see how this progresses."

The top man

Unilever is in an interesting position for investors. After a profit warning in 2004 and sluggish sales growth thereafter, Paul Polman took over as chief executive in January 2009.

Mr Polman was the first "outsider" in Unilever's 80-year history to land the top job, the company having previously always promoted from within its ranks. The market approved of the new appointment, with good reason.

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The 52-year-old Dutchman had served 27 years with Procter & Gamble, and done a 3-year stint as chief financial officer of Nestle before moving to Unilever.

His background, in terms of age, nationality and his P&G "apprenticeship", is remarkably similar to that of Bart Becht, the highly successful chief executive of Reckitt Benckiser, with which Unilever has often been unfavourably compared during the past decade.

Vision

Mr Polman's vision for Unilver is also not dissimilar to Reckitt's. After a year at the helm he said:

"We will continue to focus on volume growth as the main driver of long-term value creation, whilst delivering steady and sustainable year-on-year improvement in operating margin and strong cashflow."

Brands have been strengthened by better quality innovation and a step-change in advertising and promotional spend. The company has also moved fast towards a stronger performance culture.

All these themes were reiterated in the latest results, Mr Polman telling us that the company remains focused on growing volumes, operating margin and cash flow, and that: "The Unilever of today is more agile and confident, now fully fit to compete."

Valuation

Despite the progress, the management team, which is still relatively new, doesn't yet appear to have quite convinced the market of its credibility, judged by the fact that Unilever continues to trade at a discount to its peers:

CompanyShare pricePrice/salesOperating
Margin
(5 years)
Forecast
12 month
price/earnings
Unilever£18.621.5x14%13.3x
Reckitt Benckiser£34.333.0x22%14.9x
Procter & Gamble$62.792.3x20%15.0x
Colgate Palmolive$76.052.5x20%15.1x

I reckon the market's relative valuation of Unilever is on the harsh side, given the promising start made by Mr Polman and the company's rosy-looking long term prospects.

Unilever has already made far bigger inroads into emerging markets (EM) than many of its peers, providing it with a strong engine for growth.

Chief financial officer Mr Huet has only been in his post for 13 months but in that time EM sales, as a proportion of the group's total, have grown from 48% to 53%. Mr Huet expects EM sales to continue rising in the longer term: "If growth rates continue as they are today we should not be surprised if EM is at three quarters, if not more, of our business."

Sticking with the longer term, Unilever looks to have the potential to increase its margins closer to those of its peers and can aspire to price/sales and price/earnings ratings more in line with theirs.

In the meantime, a forecast dividend of around 74.5p for 2011, representing a yield of 4%, is an attractive return to be going on with, whether for an income seeker or an investor looking for a re-rating of the shares in the longer term.

More from G A Chester:

> G A Chester owns shares in Reckitt Benckiser.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

F958B 03 Feb 2011 , 3:26pm

My concern is that if commodity-related input costs don't stabilise, it could hurt many of the food/household product companies; they are only glorified manufacturing businesses in a more stable niche.
Manufacturing companies are often squeezed by the retailers who sell their product.
Additionally, given the recent very strong results from discount stores such as LIDL and ALDI, you have to wonder just how much down-trading there will be in consumers purchases - including from "branded" to "own label".

I think that the sector is relatively expensive compared to other less-cyclical companies - including being more expensive than the supermarkets that sell their products.

However, a good portfolio probably deserves some representation from these types of companies and ULVR looks one of the cheaper options.

Luniversal 03 Feb 2011 , 4:21pm

In the past ten years Reckitt Benckiser's dividend has grown twice as fast as Unilever's: by 13.4% pa in real (post-RPI) terms.

However, Unilever now yields 3.9% to RB.'s 3.1%.

mcturra2000 03 Feb 2011 , 5:13pm

"We will continue to focus on volume growth as the main driver of long-term value creation, whilst delivering steady and sustainable year-on-year improvement in operating margin and strong cashflow."

Very laudable, but is what he's saying very meaningful, or just the words we want to hear? I can roll out the buzzwords as well as the next guy, but that doesn't necessarily mean I can deliver on them.

The company has also moved fast towards a stronger performance culture.

I always get a little worried about statements like that. Does it mean that they're going to strip out the fat, pull their finger out, and finally do things right; or does it mean some kind of cult of personality and short-termism at the expense of long term profitablity and doing things right?

Time will tell.

propolis 05 Feb 2011 , 8:26pm

I bought McBride some time ago thinking people would trade down to own brand goods during hard economic times. Lost a packet so far as the Unilevers of this world do half price offers and the supermarkets screw McBride for a better deal. Other than supermarkets McBride doesn't have other customers so must accept their pricing policy - the same as farmers etc. who deal with the big four. Whilst people have to buy washing powder, food etc. I think profit margins will be tight so am cautious on this one.

eccyman 08 Feb 2011 , 6:27pm

Call me cynical, but aren't the raw ingredients of most consumer goods a tiny fraction of the retail price of the end product?

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