Unilever (LSE: ULVR) (NYSE: UL.US) shares have risen by 142% over the last 10 years, but the consumer goods firm’s share price performance has cooled recently, and Unilever’s share price is down by 13% from the all-time high of 2,862p we saw in May 2013.
Does this decline make Unilever a buy, or are the firm’s shares likely to fall further before recovering?
I’ve taken a closer look to find out more.
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Pricey P/E
Let’s start with the basics: how is Unilever valued against its past earnings, and the market’s expectations of future earnings?
|
P/E ratio |
Current value |
|
P/E using 5-year average adjusted earnings per share |
21.4 |
|
2-year average forecast P/E |
18.2 |
Source: Company reports, consensus forecasts
Unilever shares haven’t been cheap for a long time, and they still aren’t.
The firm’s underlying growth and free cash flow compensates to this for some extent: Unilever’s dividend has been consistently covered by free cash flow in recent years (unlike most UK supermarkets, for example) and the firm’s 3.6% prospective yield in line with the FTSE 100 average.
However, Unilever’s sales fell last year, and profits are expected to fall this year. Is the Anglo-Dutch firm’s premium price tag still justified?
A closer look
Unilever’s first-half results were encouraging, with emerging market sales up 6.6% and the firm’s core operation margin stable at a very healthy 14%, despite turnover falling by 5.5% due to currency effects.
However, a year is a short time for a large firm like Unilever, and in my view it’s more important to look at the medium-term trends before deciding whether to buy or sell.
I’ve taken a look at some of the firm’s key fundamentals over the last five years:
|
Metric |
5-year compound average growth rate |
|
Sales |
+4.6% |
|
Adjusted earnings per share |
+2.6% |
|
Dividend |
+6.1% |
|
Book value |
+3.3% |
|
Net debt |
-2.8% |
Source: Company reports
It’s a pretty well-rounded picture, in my view: shareholders have been well rewarded by a rising dividend, while the firm’s net debt has actually fallen by an average of 2.8% per year.
I don’t see anything to be concerned about here. Looking ahead, City analysts expect more of the same: current forecasts suggest both earnings per share and the dividend will rise by around 6% in 2014 and 2015.
Is Unilever a buy?
As a long-term Unilever shareholder, I’d be happy to top up my holding at today’s prices, but I do think that the company’s shares are a little expensive, even given their above-average growth prospects.
Unilever’s share price has fallen by 5% over the last three months — it’s possible that this fall might continue, providing an attractive buying opportunity later this year or early next year.
