The following is a reprint of my January 14, 2008 RealMoney column.
Unilever (UN) is one of the leading providers of consumer staples worldwide. Some of its brands include Lipton, Breyers, Hellmann’s, and Slim-Fast in foods, and Dove, Close-up, Snuggle and Surf in household and personal products. In other words, the type of products that should be relatively immune if consumer spending turns down.
Unilever’s corporate structure can be difficult for many investors to understand. Since 1930, the company has been run by two controlling companies – Unilever NV and Unilever PLC (UL). Unilever NV and PLC have separate legal identities but operate as a single entity. The company provides the following graphical aid on its web site:
After a few minutes trying to figure this out, many investors are probably thinking they should look at Colgate-Palmolive (CL), Procter & Gamble (PG) or Heinz (HNZ) instead. I think it’s worth the time spent to get to know Unilever, though, because it looks like a better value in many ways. Consider the following table:
|
|
Price/2008 Earnings
|
Estimated Growth
|
Free Cash Flow Yield
|
|
Unilever
|
15.1
|
10.4%
|
4.0%
|
|
Colgate-Palmolive
|
21.0
|
10.8%
|
3.5%
|
|
Procter & Gamble
|
17.9
|
12.9%
|
4.3%
|
|
Heinz
|
16.3
|
7.9%
|
3.7%
|
|
Average
|
17.6
|
10.5%
|
3.9%
|
Unilever offers the lowest P/E ratio, growth in line with the average and an above-average free cash flow yield. (I define free cash flow as the cash generated from operating activities over the last 12 months minus capital expenditures over the same period. Free cash flow yield is free cash flow divided by enterprise value.) Free cash flow yield is my preferred measure because I think it levels the playing field between the ways companies can generate return such as dividends, share buybacks, acquisitions or internal growth.
P&G also looks good in this comparison, with higher growth and a higher free cash flow yield than Unilever. But a couple of other factors lead me to (slightly) favor Unilever.
First, Unilever shares shed 9% of their value last week, bringing them to much more attractive levels after they reported earnings and a Morgan Stanley analyst expressed concern over raw materials prices. But Procter faces the same issues, and the stock did not come in nearly as much. As a result, I think the concern is more “priced in” at Unilever.
Second, in recent weeks Unilever’s earnings estimates for 2007 and 2008 have been marching up steadily. The 2008 estimates were $2.10 two months ago, but now stand at $2.21. As a result, the Zacks Rank measure of earnings momentum puts Unilever in the top 20% of all companies. Procter’s estimates haven’t budged from $3.92 in that time.
It’s true that the raw materials concerns could start to rein in estimates. Again, however, this should apply to both companies.
With a 4% free cash flow yield, Unilever compares favorably to the current 3.15% yield of 5-year Treasuries. Adding in the 10.4% growth rate estimated over the next five years produces a potential total return of more than 14% per year. Alternatively, if Unilever’s P/E could rise to the industry average over the next year it could generate a 16% return for that period.
In today’s uncertain economic environment, I’d be willing to accept quite a bit less than that.
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The Conference Board Consumer Confidence Index, which had increased moderately in June, posted another slight increase in July. The Index now stands at 106.5 (1985=100), up from 105.4 in June. Earnings reports have come in strong for the most part.
