Today I am looking at why I believe Unilever (LSE: ULVR) (NYSE: UL.US) is an excellent stock selection for savvy investors.
Spicy growth prospects in emerging regions
Unilever noted in July’s half-year results release that surging performance in developing regions had experienced some slowdown in recent months, the impact of wider macroeconomic issues applying pressure on its customers’ wallets.
Despite slowing activity here, however, underlying sales growth still rose by a more than respectable 10.3% during January-June, which helped drive group sales 5% higher. And the firm continues to gear up its presence in these territories to undergird future growth, including the bolstering of its stake in India’s Hindustan Unilever to 67% in July.
The household goods giant’s share price has fallen almost 10% since July’s release, which I believe represents a fresh buying opportunity. Despite recent price weakness, the firm is still trading at a premium to its food processor and producer peers, dealing on a prospective price-to-earnings (P/E) rating of 18 versus an average of 13.3 for its sector rivals. But I believe that still-lucrative growth rates in new markets, combined with the strength and thus pricing power of its key brands, justifies this elevated rating.
Strong product pipeline keeps on delivering
Unilever continues to bring on line innovations across its bulging product portfolio, and the introduction of its compressed deodorant products, Dove ‘Repair Expertise’ and ‘Men+Care’ hair range and Magnum ‘5 kisses’ ice creams, have all performed well since rollout earlier this year.
The company’s constant merry-go-round of product relaunches — such as its Lipton Yellow Label tea brand — and introduction of established brands in new markets is also showing strong promise. Recent successful introductions include Pond’s Flawless White BB skin cream, which is undergoing widespread rollout in new geographies after a successful launch in Thailand.
Food sales ready to unlock more value?
Some commentators believe that the purchase of H.J. Heinz Company by Warren Buffett’s Berkshire Hathaway Inc. and private-equity firm 3G Capital in June could herald waves of interest from potential buyers for Unilever’s Food division.
Indeed, this division — which generates sales of around $26bn per year — spun off its Wish-Bone and Western salad dressings brands to Pinnacle Foods last month, for around $580m or more than three times enterprise-value-to-sales (EV/sales). Food is undoubtedly the laggard of the group, with sales rising just 0.2% in January-June versus 5% for the whole group.
So, in my opinion, the premium that Unilever could attract for these underperforming food assets could see more labels hit the chopping block, delivering extra shareholder value and removing some of the flotsam to create a more streamlined group.
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> Royston does not own shares in Unilever. The Motley Fool has recommended shares in Unilever.
