Reaffirming Our Belief in Unilever

 | Jan 25, 2013 | 11:00 AM EST
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Let's revisit Unilever (UL), a global leader in foods and consumer products. We recommended Unilever in May 2012 as a steady dividend-paying stock that had reasonable upside potential. We stated that it was a solid anchor for any all-weather portfolio, thanks to a below-market beta ratio of 0.75 and an above-average dividend yield.

We also believed that management changes at the company, including a new CEO, could increase the potential for earnings upside and stock appreciation. Our recommendation was predicated in part on the sense that investors weren't taking into account the new executive changes at the company, which could reverse the effects of the company's disappointing prior leadership.

Since we made our recommendation, Unilever has had better-than-expected earnings over the past few quarters and a nice increase in its stock price. This week, Unilever reported that it beat estimates during its last quarter on rising growth in emerging markets and expanding margin levels. More importantly, management gave a very upbeat outlook for a continuation of these positive trends.

Originally, investors weren't expecting better numbers, because 50% of company sales come from North America and Europe, regions that were experiencing a weak macro environment and rising inflationary pressures. In fact, European sales actually rose 0.2%, compared with an expectation of a 0.2% decline, thanks to product refreshes. North America also beat expectations with 6% growth. And emerging-market sales were up 13% in the quarter, lifting overall revenue significantly.

In addition, results benefited from improved core margin performance of 30 basis points from recent cost-reduction actions. As a result, guidance for earnings per share is being bumped a bit higher to $2.31 for 2013, compared with expectations of $2.28 prior to the release. Analysts and investors are also beginning to look past previous disappointments and are regaining confidence that improvements will continue and that guidance will be more reliable.

Indeed, the core trends show that Unilever is on the mend. As a result, we believe Unilever will continue be a long-term winner, given its healthy dividend and reasonable appreciation potential. In the near term, demand continues to be better in all of the core emerging-markets operations.

Unilever's management is expected to continue to boost margins through continued re-engineering and restructuring actions. These actions should provide a longer-term growth opportunity, since Unilever's operating margin is still below 16%, compared with 19% to 22% for other blue-chip global consumer products organizations such as Procter & Gamble (PG), Nestle and Colgate-Palmolive (CL).

Furthermore, the firm has a long history of paying a favorable and rising dividend, and its current yield is 3.2%. At a recent price of $39.81, Unilever trades at 17.2x 2013's EPS estimate of $2.31 and 16.1x 2014's EPS estimate of $2.47.

As margins increase, Unilever should trade for 17x to 19x earnings, which would be in line with its major global consumer-products peers. For the next decade, Unilever should be able to consistently increase its revenue 5% to 6% per year, its earnings 8% per year and its dividend at 6% to 8%. We expect these trends to continue.

We continue to like Unilever as a holding that provides stability, a healthy income stream and reasonable growth over time. Our target in the next six to 12 months is about $44 per share.

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