Today’s update from Reckitt Benckiser (LSE: RB) showed that the company is making progress with its goal of increasing revenue by 5% per annum. Indeed, it believes that the best way to achieve this is to de-merge its pharmaceuticals arm into a separate, standalone company so that Reckitt Benckiser can focus on improving sales of hygiene, health and consumer products. This seems to make sense, especially since the company has cautioned that the second half of the year could see demand weaken due to a tough climate in the US and certain emerging markets.
This sentiment was echoed by rival Unilever (LSE: ULVR) (NYSE: UL.US), which said in its recent update that it is experiencing pricing pressure in developed countries and a general slowdown in demand in Asia. Despite this, shares have posted strong gains in 2014, being up 5% versus just 1% for the FTSE 100, although they are some way behind Reckitt Benckiser’s 9% increase during 2014. Looking ahead, which of the two companies is the better investment?
Growth Potential
Despite both companies reporting disappointing levels of demand in emerging markets, Reckitt Benckiser and Unilever both have vast potential when it comes to long-term sales growth. Indeed, on this front, Unilever could have the edge, since its products tend to be more luxurious and more discretionary than many of Reckitt Benckiser’s. This could allow Unilever to take advantage of increasing wealth levels and the rapid growth in the middle class in emerging markets to a greater extent than Reckitt Benckiser.
Even in the short term, Unilever’s forecast growth in earnings is higher than that of Reckitt Benckiser. For instance, while Unilever is set to report growth in earnings per share (EPS) of just 1% this year, the company is expected to bounce back next year with growth of 9%. Reckitt Benckiser, meanwhile, is forecast to deliver a reduction in earnings of 6% this year, followed by growth of 5% next year.
Valuations
As two companies with considerable long-term potential, as well as a stable of highly lucrative brands, Unilever and Reckitt Benckiser are unlikely to ever be cheap. Indeed, their current price to earnings (P/E) ratios are 20.2 (Reckitt Benckiser) and 20.3 (Unilever). Although marginally higher, Unilever seems to offer better value than its peer as a result of its higher forecast growth rate, but also because it pays a higher yield. While Reckitt Benckiser’s yield is just 2.6%, Unilever currently yields 3.4%, which is in-line with the market average.
Looking Ahead
Indeed, when it comes to which is the better buy, Unilever seems to edge out Reckitt Benckiser. That’s because, while its current valuation is slightly higher, it appears to offer superior short and long term growth prospects to its rival, as well as a higher yield. While both companies could have strong futures, Unilever could have the slightly brighter one for investors.
