Why I’d buy this FTSE 100 stock Warren Buffett has his eye on

Multi-billionaire investor Warren Buffett has run the rule over this FTSE 100 (INDEXFTSE:UKX) stock. G A Chester discusses why its current valuation could be attractive.

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It’s perhaps inevitable that we tend to focus on a company’s latest results. After all, we’re interested in its current valuation and whether it makes for an attractive investment. However, it’s good to pull back the focus now and again, and remind ourselves of the historical perspective. This can provide further insight into where a company’s at now. I spent a bit of time at the weekend doing this with FTSE 100 consumer goods giant Unilever (LSE: ULVR).

‘Paul Polsen’

In January 2009, Unilever broke with its long tradition of promoting internal candidates to the chief executive role when it handed the job to an outsider — former Procter & Gamble and Nestlé man Paul Polman. In keeping with a perception of Unilever as a company that was a bit set in its ways and in need of re-energising, someone got the new chief executive’s name wrong in the annual results news release a month later, and had to issue a correction: “The CEO of Unilever’s name is ‘Paul Polman’ and not ‘Paul Polsen’, as originally issued inadvertently.”

I’ll come back shortly to the changes Polman has made at Unilever in his near-decade at the helm. First, though, I want to look at the progression of earnings and share price over the period.

Should you invest £1,000 in Legal & General right now?

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The aforementioned 2008 results, posted on 5 February 2009, showed underlying earnings per share (EPS) of €1.43 (128p at a £/€ exchange rate of around 1.12 at the time). The shares closed on the day at 1,396p. At the end of last week the share price was 4,146p and trailing 12-month EPS was €2.33 (203p at a current exchange rate of 1.145). As you can calculate, the share price has increased by 197%, and EPS by 63% (or 59% on a sterling basis). The result is that while investors back in February 2009 were buying at 10.9 times earnings, investors today are paying 20.4 times earnings.

Polman’s progress

There’s no doubt in my mind that Unilever’s valuation was cheap in 2009. We were in the depths of a bear market and the 10.9 times earnings multiple was well below the FTSE 100’s long-term historical average of 15, or so. Furthermore, companies in the ‘defensive’ consumer goods sector typically trade on higher multiples than the market average. But what of Unilever’s 20.4 times earnings rating today? There are three possibilities: it’s still undervalued, it’s fairly valued, or it’s overvalued.

I believe the changes Polman has made at Unilever, which have delivered rising profit margins (among other positive things), mean the company is an intrinsically more valuable enterprise today than when he took the helm in 2009. It’s moved closer to its historically more dynamic Footsie peer Reckitt Benckiser, a stock I’d be comfortable paying up to 25 times earnings for, on a long-term perspective.

Warren Buffett seal of approval

My view of Unilever is buttressed by the price legendary US investor Warren Buffett was willing to pay for it. Kraft Heinz, controlled by Buffett’s Berkshire Hathaway, and private equity firm 3G Capital, failed with a 4,000p a share offer for Unilever in February 2017.

Unilever’s trailing 12-month EPS — on the same underlying basis as today — was €2.03 (173p at a £/€ exchange rate of around 1.175 at the time). So Buffett’s price, represented 23.1 times earnings compared with today’s valuation of 20.4 times. As such, I’m comfortable rating Unilever’s shares a ‘buy’ at their current level.

Should you invest £1,000 in Legal & General right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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