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Why I Would Buy Unilever plc And Volex Group PLC But Sell Kingfisher plc

Today I am looking at the investment case for three London-listed plays.

Unilever

Household goods goliath Unilever (LSE: ULVR) has bounced higher in recent months, as concerns over slowing consumer spending power in developing regions have moderated. While it is true that sales in these territories expanded by ‘just’ 5.7% last year, down from 8.7% in 2013 and 11.4% in 2012, I believe that galloping spending power from customers in these far-flung should power group profits higher over the long-term.

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Indeed, the City’s army of number crunchers expect Unilever to wave goodbye to the problems that have hampered earnings growth in recent years, and the business is expected to punch robust rises to the tune of 13% and 9% in 2015 and 2016 correspondingly. These figures create P/E multiples of 21.7 times prospective earnings for this year, and 20.3 times for 2016, some way outside the value benchmark of 15 times or below.

Still, I believe that Unilever’s terrific exposure to lucrative emerging markets — the company sources around 60% of total sales from such regions — combined with a broad suite of industry-leading products from Dove soap to Domestos bleach, labels which carry formidable pricing power, fully merits this premium price. I fully expect earnings growth to rocket higher in the coming years.

Volex Group

Power and data cable manufacturer Volex Group (LSE: VLX) cheered investors today after a bubbly trading update, driving the shares 1.1% higher in end-of-week trading. The company announced that it expects profit for the full financial year to come in line with guidance, and added that it had completed its all-singing, all-dancing transformation plan. These measures have already had a positive effect on sales and margins, it noted, a trend which Volex expects to carry forwards.

Barclays analysts expect Volex to swing from losses of 9 US cents per share last year to earnings of 2.6 cents in the year concluding April 2015, in turn creating an elevated P/E rating of 37.4 times. But with earnings anticipated to surge to 7.5 cents in fiscal 2016, this figure falls to a much-more appetising 12.8 times.

And earnings forecasts of 12.9 cents the following year pushes the earnings multiple to just 7.5 times — any reading below 10 times is widely regarded a steal. With restructuring at the plan now complete, and Volex vowing to increase investment across the company and to extend its customer base, I believe that the Paddington firm is in good shape to enjoy improving demand for its products.

Kingfisher

DIY giant Kingfisher (LSE: KGF) suffered a whack in the midriff yesterday with news that its proposed €275m acquisition of France’s Mr Bricolage chain had hit the buffers. Last summer the British company had agreed to purchase ANFP’s 41.9% holding in the Gallic business, as well as the 26.2% stake held by the founding Tabur family, with a full takeover expected afterwards.

But Kingfisher announced that the French parties were no longer interested in obtaining the necessary competition clearances for the deal to go through, and advised that it is now “considering all of its options.” The news comes a huge blow to Kingfisher’s overseas expansion plans, and follows December’s decision to sell 70% of its struggling Chinese business for £140m.

It is true that improving retail conditions in the UK should continue boost sales across its Screwfix and B&Q outlets looking ahead — the firm announced in November that retail profit in its domestic markets rose 11.1% during the previous three months. But while sales performance continues to drag in France, as well as in its other continental markets, I believe that Kingfisher remains a risky selection at the current time.

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Royston Wild 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.