Doing many things right
Unilever’s doing many things right. Despite facing weak markets just like other firms operating abroad, the firm’s third-quarter results are encouraging. For the nine months of the year so far, underlying sales grew of 3.8% and volumes are up 2.1%. City analysts following the firm expect this progress to boost earnings by 8% for the full year with a further 6% uplift during 2016.
The chief executive puts the current success down to a long-term view whereby the company attacks costs and keeps up sustained investment in brands, infrastructure and people. He does sound something of a warning, though, saying the firm “continues to see soft global markets with no immediate sign of getting help from an improving global economy”.
Lots of companies, and fund managers such as Neil Woodford, have been saying similar things about the global economy. That does make me wonder whether the next move in the global economy might be down — if it can’t improve now, when will it? Perhaps the recovery for this macro-cycle is already in the bag. If so, treading water can only be kept up for so long before exhaustion sets in.
Whether or not the economy worsens from here, Unilever will be capable of falling back on its cash-generating ‘defensive’ characteristics to provide some support for portfolios containing the firm’s shares, I reckon. At today’s 2890p share price, the forward price-to-earnings ratio (PER) runs just below 21 and the forward dividend yield at 3.2%. Forward earnings will likely cover the dividend payout 1.5 times. Unilever’s not cheap, but sometimes it’s worth paying a little more for something better.
Perhaps an unexpected jewel in the crown of food producer Associated British Foods is its ownership of the fast-growing discount-clothing store chain Primark. The retail operation through Primark delivers around 50% of the firm’s profits, and growing.
Since 2012, the shares have shot up and now the valuation is high. At today’s 3296p, the forward PER sits at around 32 for 2016, but City analysts following the firm only expect earnings to lift about 4% that year. Whether it’s the well-known nature of the Primark store estate or some other factor causing this investor exuberance, I don’t know. However, at this level, I’m not interested, because a lot of future growth seems already priced-in to the shares.
Sausage skin manufacturer Devro isn’t a whizzy dizzy business but it does provide a product with high demand. The firm also enjoys something of a tailwind as the trend to replace animal intestine sausage coverings with collagen plays out. The firm is expanding in China, too, so doesn’t seem short of growth potential.
Back in August, the chief executive told us that sales volumes are growing in several important markets and prices remain firm. That’s a reassuring message. The firm is making progress transforming its manufacturing facilities to support future growth and to help manage costs.
We can get hold of the company’s shares for a forward PER of 18 at today’s share price of 297p. For that, we’ll get a forward dividend yield of 3.1% with forward earnings likely to cover the payout around 1.8 times during 2016. City analysts following the firm expect earnings to rise 15% this year with a further 5% uplift next year.
I like Devro’s set-up but remain cautious because the shares traded at lower ratings than this in the past. In fact, the shares have been quite volatile in recent years and shall probably remain so, which raises the possibility of a better-value entry point down the road.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Devro and 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.