In one of my previous articles, I mentioned that it becomes increasingly difficult to find attractive stocks in the United States (see: this article). Therefore, I looked into attractive European alternatives for their U.S. peers. I find that Unilever (UL, UN) is a good European alternative for U.S. consumer goods peers, like The Proctor & Gamble Company (PG) and Kimberly-Clark (KMB).
Unilever is a Dutch/British manufacturer of consumer goods. The company is headquartered in London, the United Kingdom and Rotterdam, the Netherlands. The stock has two listings in the United States. The UL ticker represents Unilever plc, the British Holding company. The UN ticker represents Unilever N.V., the Dutch Holding company.
Unilever is a multinational that is present in all continents around the world. The company operates in four business segments: personal care products, foods, refreshment and home care. Unilever represents several well known global brands, like Dove, AXE, Lipton, Ben & Jerries, OMO, CIF and Bertolli.
Unilever delivered strong fourth quarter earnings (see: this report). The company managed to increase last year's underlying sales by 4.5%, due to an increase in volume (2.8%) and price (1.5%). The increase in underlying sales was driven by a strong performance in the emerging markets. Last year's underlying sales growth in the emerging markets was 8.7%, due to an increase in volume (4.8%) and price (3.9%), compared to 2012. Unilever's core earnings per share increased by 3% to € 1.58 ($2.16) a share.
Despite Unilever's strong fourth quarter earnings report, the stock did not perform very well over the past 12 months (see graph above). The stock gained just 0.90%, worse than its peers Proctor & Gamble (+7.8%) and Kimberly-Clark (+24.8%). To find out whether Unilever is undervalued compared to Proctor & Gamble and Kimberly-Clark, I compared the trailing P/E ratio, forward P/E ratio, dividend yield and pay-out ratio in the table below:
|EPS FY '14||$2.24||$4.27||$6.10|
|EPS FY '15||$2.34||$4.65||$6.53|
Source: Yahoo! Finance
According to the data in the table above, Unilever is equally valued compared to Proctor & Gamble and Kimberly-Clark. The trailing P/E ratio of the three companies ranges between 17.60 (Kimberly-Clark) and 18.54 (Proctor & Gamble). Unilever's trailing P/E ratio is 18.09, in the middle of that range. The forward P/E ratio ranges between 16.45 (Kimberly-Clark) and 17.32 (Unilever). Unilever's dividend yield (3.60%) is a bit higher, compared to Proctor & Gamble (2.80%) and Kimberly- Clark (3.00%).
In my opinion, Unilever's estimates are a bit conservative. Unilever earned $2.16 per share in 2013. According to these estimates, Unilever will lift earnings per share by 3.7% in 2014 and 8.3% in 2015 compared to last year's earnings per share. Europe, an important market for Unilever, is likely to recover from the financial crisis. Unilever earned 27% of its total revenue in Europe last year. Therefore, the recovery in Europe should support revenue and earnings per share in the next couple of years.
Unilever did perform very well in the emerging markets as well. Despite the slowing growth figures in China, I expect that consumer goods stocks will continue to grow sales and earnings in the emerging markets, because the Asian middle class will grow significantly in the upcoming years (see: this article). As a result, more and more people are able to afford the personal products that are supplied by companies like Unilever, Proctor & Gamble and Kimberly-Clark.
All together, I find Unilever is an attractive alternative consumers goods stock for investors that already own U.S. peers, like Proctor & Gamble and Kimberly-Clark. Unilever is likely to benefit from the recovery in Europe. This will support revenue growth and earnings per share in the next couple of years. The company is equally valued compared to its peers and provides a nice 3.60% dividend yield.