There are things to love and loathe about most companies. Today, I’m going to tell you about three things to loathe about Unilever (LSE: ULVR) (NYSE: UL.US).
I’ll also be asking whether these negative factors make this FTSE 100 consumer goods giant a poor investment today.
Operating margin
Unilever is often spoken of in the same breath as FTSE 100 consumer goods peer Reckitt Benckiser. Both companies are widely regarded as “quality” businesses. When we look at operating margins, though, as in the table below, Reckitt easily comes out on top.
| 2008 | 2009 | 2010 | 2011 | 2012 | Average | |
|---|---|---|---|---|---|---|
| Unilever | 14.9% | 14.4% | 15.0% | 14.3% | 13.7% | 14.5% |
| Reckitt Benckiser | 23.4% | 24.5% | 26.0% | 26.0% | 26.3% | 25.2% |
Those of you familiar with the two companies will be quick to point out that Reckitt has a high-margin pharmaceuticals division, and that looking at group margins is an apples-and-oranges comparison.
However, even when we compare the segments that overlap, Reckitt still has much superior margins. From the companies’ recent half-year results, we can see that Reckitt’s margin on food is 22.5% compared with Unilever’s 17.7%, and Reckitt’s margin across its health, hygiene and home segments of 20.3% beats Unilever’s personal care (16.6%) and homecare (4.9%) segments.
Earnings valuation
On an earnings valuation, Unilever and Reckitt are both highly rated by the market, but Unilever is currently the more expensive. At a share price of 2,672p, Unilever is trading at 19.4 times forecast 2013 earnings; Reckitt, at a share price of 4,665p, is trading at 17.3 times.
Earnings growth
Historically, Reckitt has shown superior earnings growth to Unilever. Over the last five years, Reckitt has averaged annual growth of 16% versus Unilever’s 5%. While both companies referred to challenging market conditions within their recent half-year results, Reckitt reported earnings growth of 7% against Unilever’s 4%.
A poor investment?
Despite the unfavourable comparisons with Reckitt I’ve made, Unilever is a quality business, with some things in its favour, notably a much bigger exposure to fast-growing emerging markets than both Reckitt and most other FTSE 100 companies.
The trouble is, Unilever’s 19.4 times earnings rating is above both its own historical average and the wider market’s current 15.7 multiple. A couple of years ago I wrote that Unilever was good value when it was trading at 13.3 times earnings (Reckitt was at 14.9), but I think the investment case for Unilever at the minute is rather less compelling.
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> G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended Unilever.
