Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Unilever (LSE: ULVR) (NYSE: UL.US)
What is the sustainable competitive advantage?
Unilever’s main competitive advantage lies in its wide portfolio of products, many of which are household names. Indeed, Unilever counts internationally recognisable brands, Dove and Cif as two of its key product lines.
Having said that, despite its brand portfolio, Unilever’s sales are coming under pressure from global behemoths, Procter & Gamble and Johnson & Johnson, both of whom operate in similar markets with similar products to Unilever.
Furthermore, Unilever’s sales are being depressed as customers trade down to cheaper substitutes. In particular, Unilever’s food and refreshment sales have slipped in recent years as the company’s luxury brands, such as Ben & Jerry’s are undercut by cheaper alternatives.
This is particularly visible in the company’s net profit margin, which has decreased from 12.6% to 8.6% over the past five years. Meanwhile, over the same period, revenue has expanded 27%, which indicates that the company is sacrificing profit for sales growth.
Nonetheless, Unilever has been able to use is size and experience to develop a range of low-cost but high-margin food products, which have boosted the firm’s food and refreshment division, after several quarters of slowing sales.
Company’s long-term outlook?
As I have already mentioned, the reason behind Unilever’s declining profit margin is the rising competition and aggressive cost-cutting in the company’s key markets. However, it is unlikely that this competition will abate any time soon, so it is not unreasonable to suggest that Unilever’s profit margin will continue to decline.
Moreover, the company’s diversification into emerging markets is unlikely to have a positive effect on margins, as Unilever’s highly competitive peers are also moving in that direction.
Still, demand for Unilever’s well-known products is likely to remain constant and even expand over the long term. Indeed, the majority of Unilever’s brands are used every-day by millions of consumers around the world, which indicates that the products sell themselves — a great trait to look for in a buy-and-forget investment.
All in all, despite shrinking profit margins, Unilever is a very defensive company, which is likely to see a sustained demand for its products over time.
So overall, I rate Unilever as an average share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article. The Motley Fool has recommended shares in Unilever.