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Why Unilever plc Is A Better Buy Than Associated British Foods plc And Reckitt Benckiser Group plc

Unilever (LSE: ULVR), Associated British Foods (LSE: ABF) and Reckitt Benckiser (LSE: RB) are three blue-chip stocks in the consumer non-cyclical goods sector. All three stocks have good long term growth prospects, but also trade at a premium to the rest of the FTSE 100 index on a price to earnings ratio basis.

To determine which is the better stock, I intend to look at potential near term catalysts and longer term fundamentals affecting each company.

Unilever

Unilever is the cheapest on a forward P/E basis, with its shares trading at 19.5 times its expected 2015 earnings.

A recent report from Goldman Sachs warned that the rise of e-commerce in the grocery market would likely lead to greater competition between home care and food brands. As online supermarkets are not limited by shelf space, they can stock a wider range of products, allowing more brands to list their products.

Although food and homecare products account for around 45% of Unilever’s sales, the company is expanding into the personal care sector, which currently accounts for 37% of the group’s sales. Growth in the personal care space, particularly in the premium segment, is expected to be more robust in the future, as consumers consider price to be a less important factor in the making of the purchasing decisions for their hair and skin products.

Associated British Foods

Associated British Foods is the most expensive of the three stocks mentioned here, with a forward P/E of 29.6.

ABF would too be affected by changes in the grocery market, but the company has a viable alternative growth strategy. The company is unique in owning a cyclical fashion business, Primark, which is delivering consistent double digit revenue growth from the UK and internationally. But, the brand’s expansion in the US is risky, and the response from its first US store opening has, so far, been lacklustre.

The company will likely see additional headwinds drive its earnings growth lower in the medium term. The recent strengthening in the US dollar would raise the labour costs for its clothing manufacture, and because of Primark’s low price range, its sensitivity to higher labour costs is vastly greater. On top of this, earnings from ABF’s sugar business is hard hit by a combination of lower sugar prices and the strengthening pound.

Reckitt Benckiser

Reckitt Benckiser has historically been able to deliver faster earnings growth than the other two companies in the past, but Reckitt’s days of outperforming its peers already seem to be behind it. Its out-sized exposure to home care and food products means growth for the company will likely be slower than the other two companies mentioned here.

So far, Reckitt has been able to widen its margins to counteract declining sales volume growth. But, it does not seem that Reckitt can expand its margins indefinitely, as consumers in Europe and Asia seem to be becoming increasingly price conscious.

But, there is a ray of hope from Reckitt. With its experience in marketing and developing brands, such as Nurofen, Gaviscon and Strepsils, Reckitt is well positioned to take an increasing slice of the growing consumer healthcare market.

With a forward P/E of 23.8, Reckitt’s valuation is in the middle of the two.

Conclusion

In conclusion, Unilever seems to be the best buy of the three. It has the cheapest valuations, but also one of the best earnings outlook. Near-term headwinds will likely have a smaller impact on Unilever compared with the other two companies, and this should mean Unilever’s shares would stand a better chance of outperforming the market in the medium term.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns and has recommended 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.