When I am looking for shares to buy in the FTSE 100, two companies stand out to me right now as being undervalued compared to their potential.
These are the consumer goods giants Unilever (LSE: ULVR) and Reckitt (LSE: RKT). I already own these stocks in my portfolio and would be happy to buy more in the near future.
Shares to buy now
These companies have both faced selling pressure from the market over the past few months. I can see why. Last year, Unilever and Reckitt booked windfall sales as the pandemic ignited a rush in demand for cleaning products from consumers. As the world has adapted to the new normal, this demand has diminished.
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At the same time, both firms are having to deal with rising costs, supply chain issues, and more competition from startups as well as retailers’ own brands. Put simply, these companies are having to live up to tough year-on-year growth comparisons while dealing with a whole range of other challenges.
And for a while, it looked as if they would struggle to manage. However, following their latest trading updates, any doubts the market had about their growth potential have been dispelled.
Reckitt’s revenues grew by 3.3% on a like-for-like basis in the third quarter. Meanwhile, despite cost pressures, the company believes it will maintain its profit margins for the whole year.
Unilever reported sales growth of 4% in the third quarter, with underlying sales growth of 2.5%, supplemented by price growth of 4.1%. By hiking prices, management believes the group’s profit margins will remain constant for the rest of the year.
So, overall, based on these updates, it appears as if the market’s concerns about these businesses have not become a reality. I think this presents a buying opportunity.
FTSE 100 opportunities
Shares in both Unilever and Reckitt appear attractive from a valuation perspective after recent declines. Indeed, the former is selling at a forward price-to-earnings (P/E) multiple of 17.8 (for 2022) while the latter is dealing at a P/E multiple of 19.3 (also for 2022). These figures are far below five-year average valuations, which sit in the mid-20s.
Meanwhile, Unilever offers a dividend yield of 3.7%, and Reckitt yields 2.9%.
Considering these valuations and both companies’ growth figures I think the two stocks are incredibly attractive investment propositions. That is why I would buy more of both for my portfolio today.
That said, they could face some growth challenges as we advance. These include additional cost increases, which they might not be able to pass on to consumers.
Further economic turbulence may also reduce demand for branded goods, which tend to cost more than cheaper own-brand alternatives. Consumers may opt for the more affordable option in a challenging economic environment. These are the primary challenges that could weigh on growth over the next few quarters and years.
