A Consumer Staples Giant With Solid Growth
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As the markets appear to be taking a breather from their frantic climb of the last few months, my gaze once again returns to a tried and tested sector that generally manages to outperform during stock market declines. I am speaking of course about the consumer staples sector, which produces goods that people need and will always continue to need on a daily basis. Of the available options, I am partial to Unilever PLC (NYSE: UL), one of the world’s largest producers of consumer goods. Their most recent earnings report surpassed analyst expectations, which prompted me to take a renewed look at their stock.
Unilever Group, a British-Dutch owned company with a long history, supplies fast moving consumer goods for people around the world. Its activities are grouped into four divisions, namely Personal Care, Home Care, Foods and Refreshment. The group operates more or less everywhere. With a market cap of $56.2 billion, Unilever is one of the world’s biggest players in their industry. Also the stock has a beta of .81 which means reduced volatility, something I generally appreciate in a stock.
On Thursday, Unilever delivered stronger than expected quarterly results, which prompted a number of analyst upgrades. Organic revenue growth came in at 5.9%, a lot better than the 5% analyst consensus. Volume is up 3% year to date, and turnover increased 11.1% to almost EUR 39 billion, of which EUR 13.4 billion was in Q3. Emerging markets continue to account for the bulk of the group’s growth, and currently account for about 55% of turnover. Emerging market sales increased over 12% this quarter, driven by a volume growth of 6.8%. Developed market sales growth came in at just under one percent, which is impressive according to the company considering the macro-economic backdrop.
Still, Unilever faces heated competition in developed as well as in emerging markets. Other multinationals continue to hold an impressive market share. Procter & Gamble (NYSE: PG), Unilever’s heavy-weight American counterpart in the household products division, is active in over 180 countries worldwide. However, they are still largely focused on developed markets which are good for 65% of revenue. In this respect, Unilever is ahead of the competition, and continues to invest in these growing markets in order to stimulate sales growth. Other risks for the company and its competitors include volatility in commodity prices, which is discussed in the latest earnings release, and the difficult macro-economic environment which is putting pressure on the group’s margins.
Let’s examine some of the stock’s fundamentals. Take into account that the group trades under two tickers in the US, namely Unilever N.V. (NYSE: UN) and Unilever PLC. As the second, tickered above, has somewhat better valuations, I will discuss these. The stock trades at a P/E of 18.85x compared to the industry average of 21.31x. The price to book is 5.3 which is also under the industry average. Procter & Gamble, Unilever’s biggest competitor, trades at 22x earnings and 2.94 to book. Mondelez International , the recently spun-off international division of Kraft Foods, has a very reasonable valuation of 13.44x earnings and 1.33 to book, but has trailed the industry in terms of EPS growth in recent years. Unilever has a very solid return on equity of 31.35 and a 14.9% operating margin, and offers a nice dividend yield of about 3.3%.
In summary, it appears as if Unilever is managing to stay ahead of the competition, especially in emerging markets. Underlying sales growth is strong and if the company is able to maintain this growth rate, the stock has a lot of potential upside. The valuation at the moment is quite reasonable compared to the industry, and with a low beta, the stock offers reduced volatility at a time when volatility is at best a mixed blessing. With a nice dividend yield, the stock also rewards investors for the wait.
DUJames has a positions in Unilever N.V. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Procter & Gamble Company and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.