Why I’m bullish on downgraded Unilever plc and Vodafone Group plc

Image: Unilever. Fair use.

Global consumer goods giant Unilever (LSE: ULVR) and telecommunications behemoth Vodafone Group (LSE: VOD) are two of the most popular stocks on the FTSE 100, and with good reason. However, both have been downgraded in the past week. Are their glory days over for now?

Household goodie

On Monday, analysts at Barclays downgraded Unilever from ‘overweight’ to ‘equal weight’, and reduced its target price from £39.50 to £35.65. Today it trades at £32.22. Yet this was a strange downgrade, because Barclays heralded the company’s “agility” and ability to combine global scale with local market knowledge, which it says has driven market share gains and rising margins. So far, so good.

Unilever could fall victim to its own success, Barclays warned, potentially struggling to replicate recent sector outperformance. It may also see factors beyond its control, such as emerging market uncertainties and currency trends in the developing world.


All of which warrants a “more near-term cautious stance” Barclays concluded. But I disagree. For years, I came to similar conclusions about Unilever, judging that its valuation was always a little high, the yield a little low, recent share price growth a bit too robust. But that near-term cautious stance had locked me out of one of the best long-term growth and income plays on the FTSE 100. A decade ago, Unilever’s share price was £13.78. Today it’s £32.22, around 134% higher.

The shares are down around 10% in the last six months. For a company as solid as this, that’s quite a plunge. It reduces the current valuation ratio to 18.45 times earnings, which looks expensive until you remember Unilever typically trades at between 22 and 25 times earnings. This looks more like a rare buying opportunity. The yield is now 3.38%, far higher than for some time.

On Thursday, Unilever reported turnover for calendar 2016 fell 1% to €52.7bn year-on-year, a whisker below analysts’ forecasts of €52.83bn. The stock fell nearly 5% on the news. For me that’s a reason to feel up on Unilever, not down.

Wrong call

Vodafone suffered its own downgrade on Wednesday, with Bank of America Merrill Lynch reducing it from a ‘buy’ to a ‘neutral’, warning that multiple headwinds are “unlikely to abate in the near term“. It suggested the long-awaited revenues rebound may fade and “looks unlikely to recover” until late in the March 2018 fiscal year.

I see this as another analyst being near-sighted. The big advantage private investors have is that we can invest for the long term and don’t have to answer to bosses, shareholders or investment customers. We can afford to be patient.

I’m concerned by Merrill Lynch’s view that structural changes are needed as Vodafone’s return on asset profile looks unsustainably low. It has cut its price target from 280p to 236p, but that still gives scope for some kind of growth with the stock currently trading at 192p. I wouldn’t buy as a growth story anyway. On that front, it has disappointed as it trades just 10% higher than five years ago.

Instead, Vodafone is a great income story, with a current yield of 5.95%. True, cover is wafer thin at 0.4, but the financially draining Project Spring investment programme is over, and earnings per share are forecast to grow 15% in the year to 31 March 2017, then an even healthier 24% and 27% in the two years after that. That’s why I’m also feeling up about Vodafone.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of 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.