raytoei's  Instablog

Disclosure: I bought Unilever at $25.00 last week. Unilever has dual listing, one in London and the other in Netherlands, both tickers are traded as an ADS on NYSE as UN and UL. Both should be identical, but  UL, 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, the Americas are slow growth, Asia and Africa are smaller in total revenue but 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

Year1999	2000	2001	2002	2003	2004	2005	2006	2007	200
EPS0.92	0.33	0.53	0.67	1.03	0.77	1.56	2.00	1.79	2.53
Growth	-64.13%	60.61%	26.42%	53.73%	-25.24%	102.60%	28.21%	-10.50%	41.34%

1999 to 2008CAGR11.90%1999 to 2008CAGR11.90%





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 i. totally discount management's restructuring efforts ("One Unilever" etc) as well as ignore it's ii. 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 doesn't grow ever, 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 of -14% if the Unilever doesn't grow at all, forever.


Q. How much growth is the market pricing Unilever ?

A: Currently the market thinks the CEO cannot make it, that increasing commodity prices is going to crimp its margins and P&G is eating Unilever's lunch, despite Unilever being no.1 in a number of catergories (especially in bath and shower products). The market only expects a 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 risks but I will rate this occurrence as remote.