We've decided to pitch Procter & Gamble (NYSE:PG) against Unilever (NYSE:UL) as there is a large amount of crossover between the two stocks. Not only do they feature in the same GICS sector of consumer goods, they also sell a wide range of personal care products and compete in the same markets, with the US, Europe and emerging markets being key for the companies going forward. We hope you enjoy the comparison and that you let us know what you think!
Procter & Gamble Edged Out In Terms Of Profitability
From our research it is clear that both companies are highly profitable. For example, Procter & Gamble has been able to deliver return on equity of 16.01% and return on assets of 7.34% in its most recent year, both of which are very impressive figures. However, Unilever is in even better shape when it comes to profitability, as its return on equity was 40.14% and its return on assets were 9.19% last year. Of course, Unilever has a higher debt to equity ratio than Procter & Gamble, which helps to boost its return on equity score (Unilever's debt to equity ratio is 93% versus 52% for Procter & Gamble), but even taking this into consideration, it appears to be more profitable than its rival.
Mixed Recent Quarters
Interestingly, operating margins are higher for Procter & Gamble than for Unilever (19.57% versus 14.88%) and, although Unilever's bottom line grew strongly at +16% last quarter, this was partly a result of asset disposals that made a positive contribution. Excluding these still means Unilever had a stronger quarter than Procter & Gamble, although both companies' top lines reflect weaker-than-expected demand from emerging markets, as well as some pricing pressure in the US. Indeed, their top lines fell by 0.2% (Procter & Gamble) and by 5.5% (Unilever) last quarter.
Less Debt, Strong Growth
As mentioned Procter & Gamble utilizes less financial leverage than Unilever, although we feel that both companies are able to service their debt very comfortably due to them having interest cover ratios of 23.25 (Procter & Gamble) and 18.94 (Unilever). Dividend yields are very similar, with both companies being attractive for income seeking investors on yields of 3.2% (Procter & Gamble) and 3.3% (Unilever). Their growth forecasts, meanwhile, are broadly similar although Unilever edges this slightly, with it being expected to deliver earnings growth of 8.52% next year versus 7.64% for Procter & Gamble.
We're surprised to see that Procter & Gamble trades at a discount to Unilever on a number of valuation metrics. That's because our research suggests that both companies offer investors a great deal of potential, with them being highly profitable, having good yields, as well as attractive growth prospects. For example, its forward P/E is 5% below that of Unilever at 17.5 versus 18.4, while its price to book ratio is 53% lower than its peer at 3.2 versus 6.8. Furthermore, the PEG ratios of the two companies show a wide margin, with Procter & Gamble having a PEG of 2.32 and Unilever's PEG being 3.91 - that means that Procter & Gamble has a PEG that is 41% lower than that of Unilever. While there is only a small (2.5%) difference in their EV/EBITDA ratios (Procter & Gamble's is 12.4 and Unilever's is 12.7), we feel that the valuation gap between the two companies is too wide and, as such, we believe that Procter & Gamble could outperform Unilever going forward.
Procter & Gamble is a top quality company that offers high levels of profitability and a modest level of balance sheet risk. Likewise, Unilever is highly profitable and,alongside Procter & Gamble, is forecast to deliver meaningful growth next year. However, we feel that the current difference between the two companies in terms of valuation is too wide. For instance, Procter & Gamble's PEG is 41% below Unilever's, while its price to book ratio is 53% lower than that of Unilever. As such, we believe that Procter & Gamble could outperform Unilever going forward as the market responds to what appears to be a mispricing of the two stocks.
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.