2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 7.0% this year, and is 50% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Unilever (LSE: ULVR) (NYSE: UL.US) still offer good value, after five years of market gains.
Back to basics
Unilever’s share price has broadly matched the wider market’s performance over the last five years, despite having fallen by 10% over the last six months after the firm’s chief executive Paul Polman warned of a “slowdown in many parts of the world”.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
Unilever’s recent share price weakness could be an excellent buying opportunity, if the underlying strengths of the company remain unchanged:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 17.9 |
| Trailing dividend yield | 3.6% |
| Operating margin | 15.3% |
| Net gearing | 87.1% |
| Price to book ratio | 5.1 |
Unilever doesn’t look particularly cheap, but its valuation is in-line with that of UK-listed sector peers like Reckitt Benckiser and PZ Cussons. Indeed, Unilever’s yield of 3.6% is considerably higher than Reckitt (3.0%) and Cussons (2.1%).
Overall, I think that Unilever looks reasonable value at its current price, if not especially cheap.
What does 2014 hold for Unilever?
The investment case for Unilever is based on the pricing and sales power of its brand portfolio and its strong presence and considerable expertise in emerging markets, which now account for 56% of sales.
Unilever stock has been subject to a raft of earnings downgrades from analysts this year, but 2014 consensus forecasts still show modest growth over the firm’s expected 2013 earnings:
| 2014 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 17.4 |
| Dividend yield | 3.9% |
| Earnings growth | 5.4% |
| P/E to earnings growth (PEG) | 3.6 |
Unilever’s 2014 forecast P/E of 17.4 is above the FTSE 100 average of 14.0 and is not a valuation I would normally describe as cheap.
However, although there is a certain amount of future growth still priced into Unilever’s stock, I think the quality of the firm’s execution over the last six years — during which sales have risen by 27% — suggests that this isn’t an unreasonable expectation and that Unilever shares deserve a buy rating.
