UK Retail Giant Unilever: Solid Growth and Attractive Price

 |  About: Unilever Plc (UL)
by: Erik Dellith

Signs that consumer spending in the United Kingdom remains robust led us to focus on companies domiciled there. Our search turned up food-processing and personal goods giant Unilever plc (NYSE:UL).

Although the sector itself has been in the doldrums, Unilever has bucked the trend. Strong revenues and an attractive share price landed the maker of such products as Dove skin cleaner, Close-Up toothpaste, Hellmann's dressing, and Lipton tea on the Reuters screens for Relative Growth and Relative Value.

Economic conditions impact share prices in various ways. In the UK, consumers flocked to stores in July, helping year-over-year retail sales climb 3.4 percent, faster than June's pace of 2.3 percent. This is the latest indication that the U.K. economy continues to hum along at a solid clip, justifying the Bank of England's [BOE] recent decision to raise interest rates to ease activity and help stem inflationary pressure. Given this environment, we focused on UK-based companies with American Depositary Receipts [ADRs] that have recently appeared on a Reuters Select growth screen.

There is concern, however, that the BOE might raise rates further. Although 22 out of 27 analysts polled by Reuters do not expect another move, the UK stock market has priced in another 25-basis point hike. Given the uncertainty about interest rates, we also want a company that is trading at an attractive valuation. The idea here is that stocks with lower price tags have less room to fall than those trading at lofty levels in the event that market conditions turn unfavorable. As such, we want a UK ADR that also appeared on a Reuters Select value screen. Unilever is the only UK ADR that has appeared on screens in both categories.

ADRs are securities that are traded like stocks, but they are actually baskets of shares. Because they represent ownership in foreign companies, they expose investors to the typical political, economic, and currency risks associated with foreign investing. You can click here to download an Excel spreadsheet comparing the companies that recently appeared on the Reuters Select stock screens, particularly UK-domiciled ADRs.

The Relative Growth screen focuses on companies that are expanding relatively faster than their industry peers. In general, the food processing industry has experienced a slowdown in the rate of revenue growth when comparing its trailing 12-month [TTM] results with the five-year average. Unilever, however, has bucked this trend. Not only is its rate of TTM revenue growth faster than its five-year pace, but the more-recent figure has also edged ahead of the industry norm, helping the company meet key criteria for the growth screen.

Click to enlarge

Growth Rates(%) Company Industry Sector S&P 500
Sales [MRQ] vs Qtr. 1 Yr. Ago 3.35 4.25 9.78 16.87
Sales [TTM] vs TTM 1 Yr. Ago 4.84 3.99 9.36 17.36
Sales - 5 Yr. Growth Rate -3.57 9.33 8.34 9.58
Click to enlarge

Click to enlarge

Of course, revenue growth does not matter if it doesn't turn into earnings growth. Thus, the screen also looks for improvement in the rate of earnings per share [EPS] and requires that the pace of EPS growth must be faster than the company's revenue growth. Unilever's EPS growth in the TTM span is faster than its five-year norm, and its growth in the most recent quarter [MRQ] is faster yet. Further, the company's accelerating double-digit EPS improvement is a stark contrast to the industry's easing single-digit pace.

Click to enlarge

Growth Rates(%) Company Industry Sector S&P 500
EPS [MRQ] vs Qtr. 1 Yr. Ago 45.53 0.67 3.90 18.30
EPS [TTM] vs TTM 1 Yr. Ago 42.90 3.28 4.43 24.87
EPS - 5 Yr. Growth Rate 38.34 9.35 12.59 13.75
Click to enlarge

Click to enlarge

Unilever's rate of TTM EPS growth exceeded 25 percent, a key determinant in the company's presence on the Relative Value screen as well. The value screen uses this earnings requirement to help differentiate between companies that are trading at low valuations because of lackluster performance and solid companies that have attractive price tags.

The Relative Value screen is designed to find companies that are trading at reasonable valuations relative to their industry peers. Its core requirement is that stocks must be priced no more than 10 percent above the industry average on the basis of key valuation metrics, including price to earnings [P/E], P/Sales and P/Cash Flow. As indicated below, Unilever shares are priced at a considerable discount to the industry norm.

Click to enlarge

Valuation Ratios Company Industry Sector S&P 500
P/E Ratio [TTM] 6.87 20.38 20.87 19.15
P/E High - Last 5 Yrs. 77.97 31.78 36.21 37.78
P/E Low - Last 5 Yrs. 7.23 14.43 17.65 14.70
Beta 0.33 0.40 0.42 1.00
Price to Sales [TTM] 0.60 1.41 2.32 2.65
Price to Book [MRQ] 2.70 4.13 5.29 3.55
Price to Tangible Book [MRQ] NM 9.63 10.17 6.69
Price to Cash Flow [TTM] 6.44 15.07 16.46 13.87
Price to Free Cash Flow [TTM] 12.11 42.02 41.99 28.70
% Owned Institutions 7.75 49.48 57.07 67.81
Click to enlarge

Click to enlarge

While these relative valuations allow us to make quick comparisons, it is also helpful to look at a stock's valuation based on expected future performance. For this, we use the forward P/E relative to long-term EPS growth rate, or PEG, ratio. More-conservative value investors generally focus only on companies with PEG ratios below 1.00. But, numbers even a bit north of this threshold are still in value territory, so the screen is not so strict. In order to appear on the Relative Value screen, a stock needs to have a PEG ratio below 2.00.

Based on analyst estimates provided to Reuters, the current consensus EPS estimate for 2006 is $2.73 and the estimate for 2007 is $2.90. Based on the current stock price of about $23, Unilever is trading at forward P/E ratios of approximately 8.4 and 7.9, respectively. On average, analysts providing estimates to Reuters look for Unilever to grow its EPS at a long-term pace of 11.5 percent. This yields PEG ratios of under 1.00, which is low enough to appeal to even the most ardent value hunters and secure Unilever a spot on the Relative Value screen.

At the time of publication, Erik Dellith did not directly own puts or calls or shares of TMX. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by