Unilever plc (LON:ULVR), Diageo plc (LON:DGE) and Reckitt Benckiser Group Plc (LON:RB) aren’t cheap. And that's precisely their strength.
To no one's great surprise, this week has seen another set of solid results from Unilever (LSE: ULVR) (NYSE: UL.US). In a tough market, sales revenues increased by 10.5%, operating margins rose by 30 basis points to 13.8%, and earnings per share rose by 11%.
And to see the value of Unilever's twin strategy of focusing on 400 core brands -- spread across food, health and wellbeing -- and the world's fast-growing emerging markets, consider the following: underlying sales growth of 6.9% was made up of volume growth of 3.4%, and price growth of 3.3%.
No wonder, perhaps, that emerging markets now represent 55% of turnover -- and that annual sales topped €50bn (£42bn) for the first time, helped by growth of over 11% in these same emerging markets.
Strength and resilience
Now, many investors think that Unilever is a great business. Resilient, defensive, throwing off cash -- yet positioning for growth with a strong presence in some of the world's fastest growing economies.
And without much thought, it's easy to bracket Unilever with some other companies sharing those same powerful characteristics. I'm thinking of Diageo (LSE: DGE) (NYSE: DEO.US), for instance, and Reckitt Benckiser (LSE: RB). But I could also throw in ARM Holdings, as well as Apple.
Strong businesses -- and with shares that have delivered strong outperformance. Unilever, for instance, has beaten the FTSE 100 by 54% over the last 10 years. Diageo by 165%. And Reckitt Benckiser by an incredible 270%.
Expensive?
And if the share price performance has been lofty, so too have been valuations. Pretty much any time that I've looked at any of these three businesses, they've seemed expensive.
Today, for instance, all three companies are on prospective price-to-earnings (P/E) ratios of around 16, and offer yields close to -- or below -- that of the FTSE 100 as a whole.
And yet, all three companies are popular with investors, and rated as 'buys' by many analysts. Despite the fact that they're expensive, and despite the fact that they reward investors with relatively little by way of dividend income.
| Company | Forecast P/E | Forecast yield | 10-year share price growth |
|---|
| Unilever | 16.9 | 3.8% | 113% |
| Diageo | 16.4 | 2.8% | 195% |
| Reckitt Benckiser | 15.4 | 3.4% | 274% |
'E' number
Coincidentally, just the other day I heard Motley Fool co-founder David Gardner talk about just such a phenomenon. And he made it clear that he very much likes shares that go on delivering a strong outperformance, constantly hitting new highs. Supposedly 'overvalued' stocks, in fact, that might not actually be any such thing.
How come? Because a simple P/E ratio doesn't really tell investors enough about the quality of the 'E' denominator.
'E' is a number, in short, and doesn't reflect such things as the quality of a world-beating clutch of powerful consumer brands, or a strategy that will see a sales drive into as yet largely untapped markets, or a chief executive with a stellar record, or a commanding technology, or powerful supply chain or marketing strengths.
For those things, you have to look at the business, and not at a crude valuation indicator. Buy on a dip? Sure, if one comes along. But buying on long-term strength and outperformance, too, might not be such a bad idea.
Follow the money
One investor who looks beyond simple valuation metrics is Warren Buffett, whose Berkshire Hathaway investment vehicle has delivered returns of over 20% per annum since 1965, and turned Buffett himself into the world's third-wealthiest person.
As it happens, Buffett recently took advantage of weak results and a dip in the share price to top-up his holding in one particular FTSE 100 share -- an unusual move for an investor who rarely ventures outside the United States. As a result, he now owns over 5% of this company, which he first began buying back in 2006.
Its name? Simply download this free special report from The Motley Fool -- “The One UK Share Warren Buffett Loves” -- to find out. Inside, you'll discover just why Buffett has invested over £1 billion in this business, and why you could consider taking a stake too.
As I say, the report is free, and can be in your in-box in seconds. Click here to download it.
> Malcolm owns shares in Unilever and Reckitt Benckiser, but does not have an interest in any other shares named. The Motley Fool has recommended shares in Unilever.
