Unilever (LSE: ULVR) (NYSE: UL.US) is a mature company that operates in a mature industry. Therefore, it is of little surprise to find out that its free cash flow is strong and one measure of value, the free cash flow yield, indicates that Unilever may offer private investors good value at current price levels.
Indeed, Unilever’s free cash flow yield is an impressive 6.9%. Certainly, higher yields are available from other UK listed companies; however, given the quality of Unilever and its product portfolio (as well as the relatively high levels of capital expenditure it incurs) this figure is strong.
In addition, it indicates that shares are attractively priced at current levels and, moreover, were they to trade on a still very respectable free cash flow yield of 5.5%, it would mean shares would be priced at over 3,100p each. This is a potential gain of over 25% over the medium to long term.
Of course, shares have become more attractively priced of late because of difficulties experienced by the company in emerging markets, where growth rates are significantly behind what they were expected to be. Such difficulties cause a headache for Unilever because the majority of its revenue is derived from the developing world.
However, private investors could reasonably hold the view that short-term difficulties in emerging markets present an opportunity to buy shares in Unilever at a lower price than would normally be expected. In other words, the medium- to long-term story for the developing world may be intact but short-term challenges could provide the chance to buy in at a discounted price.
Furthermore, although the third quarter was a disappointment for Unilever, it expects the fourth quarter to be a marked improvement. The market may not have priced this optimism in and investors willing to buy now could get ahead of the curve and find themselves a step ahead of the market.
In addition, Unilever continues to benefit from a high degree of customer loyalty. Such loyalty does come at a cost, with the company investing heavily in marketing, although such short-term outlays almost inevitably are good in the long run and allow the company to continue to enjoy relatively high margins even when trading conditions remain challenging.
Furthermore, increases in raw materials and other input costs can, as a result of significant brand loyalty, be more easily passed on to consumers in the form of higher prices.
So, with Unilever offering an impressive free cash flow yield, short-term weakness due to issues in emerging markets and a high degree of customer loyalty, shares could reach 3,100p over the medium to long term.
