2.15 Billion Reasons That Back Up Unilever plc’s Investment Case

In this article I am looking at why Unilever’s (LSE: ULVR) (NYSE: UL.US) asset-shedding scheme should boost long-term returns.

Food sales an appetising strategy

Unilever has been busy taking the scalpel to its low-margin Foods division in recent times in a bid to concentrate on its more lucrative Personal Care and Home Care operations. Just this week the firm offloaded its Ragú and Bertolli pasta sauce brands in North America to Japan’s Mizkan Group for $2.15bn, and such measures are likely to enhance earnings in coming years.

Following the news Kees Kruythoff — president of Unilever North America — said that the deal”represents one of the final steps in
reshaping our portfolio in North America
to deliver sustainable growth for Unilever, and enables us to sharpen our focus within our foods business.”

Unilever’s Foods division has proved increasingly problematic for earnings across the group, prompting the company to accelerate divestments of many well-known brands across the globe. During the past year Unilever has also sold off its Jack Link’s meat business in Europe, which manufactures the Peperami and BiFi snacks, as well as its Wish-Bone and Western dressings and Skippy peanut butter businesses in the States.

The household goods giant confirmed fresh poor performance from its Foods arm last month, performance that was hampered to some extent by a later Easter holiday. Indeed, Foods was the only one of the firm’s four main divisions to experience declining revenues during January-March, with sales dropping 1.7% compared with a 3.6% rise for the group as a whole.

Unilever is anticipated to punch a 1% earnings decline in 2014, although a solid 8% bounceback is anticipated in the following 12-month period. These figures leave the firm dealing on, at face value at least, elevated P/E multiples of 20.3 and 18.8 for 2014 and 2015 respectively. These represent a hefty premium to a figure of 15, which is generally considered reasonable value.

Still, in my opinion Unilever is a terrific bet for long-term earnings expansion. With excellent exposure to emerging markets — around 55% of total revenues are sourced from developing regions — and a formidable stable of brands with exceptional pricing power, I believe that the firm is a terrific bet for strong earnings growth, helped by a refocused and significantly smaller Foods division.

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Royston does not own shares in Unilever. The Motley Fool owns shares in Unilever.