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.
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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.
