Why I Bought Unilever at $25

I bought Unilever last week at $25.00. Unilever has dual listing, one in London and the other in the Netherlands; both are traded as ADS on the NYSE under the tickers UN and UL. Both should be identical, but UL, in which I bought a small position, is about 4% cheaper than UN.

Q. How much should I be thinking about Unilever?

A: Europe isn't growing and the Americas are seeing slow growth; Asia and Africa are smaller in total revenue but are growing at double digits. Unilever grew revenue in 2008 by price increases; increases in unit volume was very small.

The company has a stated aim of growing 4% sales and operating margins of 15%. It is undergoing a restructuring of the units and streamlining its product lines.

A peek in the past history of EPS earnings of Unilever (click image to enlarge):

1999 to 2008 CAGR 11.90%

Despite its lumpy earnings growth, it has managed to grow at around 11.9% a year for the past 10 years. If I were to be conservative and (a) totally discount management's restructuring efforts ("One Unilever" etc.) as well as (b) ignore its past history of 11.9% annual EPS growth , I would use another metric to measure long term growth: GDP growth of the world at an estimate of 5% a year.

At EPS growth of 5%, Unilever is worth around $43 (1.73/ 0.09 - 0.05).

Q. How much is Unilever worth if it doesn't grow?

A: The EPS for 2008 is around $2.5, but the core earnings is around $1.73. So with a WACC of around 9% (well, actually it is 8%, but I use 9% for all blue chip companies), the earnings power EPV is 1.73 / 0.09 or $19+.

So if Unilever never grows, I would expect the current price to drop to a price of around $19+, a drop of around 20%

At no growth, I would still expect the company to continue to pay the dividend of 4% and a share buy back of 2%. Bring the total tally to -14% if Unilever doesn't grow at all, forever.

Q. How much growth is the market pricing Unilever?

A: Currently the market thinks that the CEO cannot make it, that increasing commodity prices is going to crimp its margins and that P&G (PG) is eating Unilever's lunch, despite Unilever being no. 1 in a number of categories (especially in bath and shower products). The market only expects 2.5% growth from Unilever.

In conclusion: Unilever is cheap, and the market has low expectations of this 70+ year old company. So while the company figures out how to get its unit volume mojo back, I will wait for patiently for the 4 + 2% dividend and share buy back returns.

There is, of course, the possibility that UL may go downhill and never recover from its restructuring efforts; that is a business risk but I will rate this occurrence as remote.

Disclosure: As stated above, I bought Unilever at $25.00 last week.

Comments

[skwestorange:]

One strength of UL that may not credited as it should be is that UL has very strong market positions in Asia in many products

Aug 02 09:06 AM

[swaps:]

I think Unilever UN or UL is an excellent core holding. When the meltdown flared up last year UN was the stock that held up the best. I am to my detriment more buy and hold and UN was the last stock to dip into the red from its purchase price and the first to recover into the green, positive column.

I have holdings that have rebounded far better, like KGC, up 76 percent from my purchase price - compared to the overall market still being way down.

But UN is a solid holding to help anchor a portfolio and the yield - my earliest buys of UN yield 5% - pumps fresh money into any portfolio.

I appreciate Raytoel providing the deeper analysis of UN that affirms my more intuitive decision to buy and hold on to it.

Aug 03 04:58 PM