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.
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."
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:
|Procter & Gamble||$62.79||2.3x||20%||15.0x|
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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