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At What Price Would Unilever plc Be A Bargain Buy?

unilever2Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.

Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.

Today, I’m going to tell you the price I believe would put Unilever (LSE: ULVR) (NYSE: UL.US) in the bargain basement.

Premium price

Unilever’s shares are currently trading at 2,640p, putting the company on a 12-month forward P/E of 19.3 — a pricey rating compared with the FTSE 100 long-term average of 14.

One line of argument goes that Unilever merits a premium price, due to its stable of powerful brands — such as Hellmann’s Mayonnaise, Dove beauty products and Domestos cleaners — and excellent exposure to the growth of consumer spending in emerging markets.

I agree that Unilever’s qualities make it a cut-above-average business; but I believe a P/E of 19.1 is too much of a premium to pay.

Bargain price

I don’t have to go back too many years to find Unilever trading at a much more attractive rating. When I was highlighting the value in the company for Motley Fool readers in the spring of 2011, the share price was 1,862p and the 12-month forward P/E was just 13.3.

Unilever had fantastic brands and enviable exposure to emerging markets at that time, just as it has now. Yet look at the difference in the earnings rating!

Consumer goods companies, such as Unilever, are considered ‘defensive’ businesses. External economic conditions have less impact on the sales and profits of such businesses than on ‘cyclical’ sectors, such as housebuilding.

Nevertheless, defensive businesses can’t entirely escape the external environment. From time to time Unilever’s shares have been depressed by short-term market worries about some external pressure or another — providing canny investors with a buying opportunity.

The spring of 2011 was a case in point. Unilever and its peers, such as Procter & Gamble, Colgate Palmolive and Reckitt Benckiser, had all reported an adverse impact from rising commodity costs, and many analysts feared input cost inflation was set to rise even more dramatically during the rest of the year.

While institutional investors — who are largely responsible for moving share prices — are often driven by relatively short-term considerations, private investors who are prepared to take a long-term view can take advantage. It’s simply a matter of having the patience to wait for the opportunities to arise, as they will from time to time.

As I mentioned earlier, I agree that Unilever is a premium business. As such, I reckon we’re in bargain territory if we can pick up the shares at or below the FTSE 100 long-term average P/E of 14.

At the moment, on Unilever’s current 12-month forecast earnings of 138p, we’d need to see the share price at 1,932p or below for a real bargain.

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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.