Unilever (LSE: ULVR) (NYSE: UL.US) shares have risen by 113% over the last ten years, as the consumer goods giant has delivered strong global growth and expanded its presence in emerging markets.
Over the last five years, Unilever’s sales have risen by more than 25%, while its operating profit has climbed by 33%, as has the firm’s dividend, which currently offers a prospective yield of around 3.5%.
Given all of this, why would I consider selling?
1. Valuation
Unilever currently trades on a forecast P/E ratio of 19. That’s considerably higher than the FTSE 100 average of 14.6, but analysts’ consensus forecasts indicate that the firm’s earnings are expected to clock in at around 131p per share this year — a mere 3% higher than last year.
In my view, that isn’t the kind of growth that justifies a premium valuation, and I expect Unilever’s share price — which has fallen by 12% over the last six months — may yet fall further, as its valuation is realigned with its slower growth rate.
2. Currency risk
Unilever’s emerging market sales rose by 6.2% during the third quarter, but a currency loss of 11.7% meant that reported turnover from these sales fell by 6.5%.
Although these losses will be offset to some extent by corresponding falls in local expenses, they do highlight how exposed Unilever’s growth markets are to exchange rate risk. The eurozone crisis is far from over and I expect the euro and other key currencies to remain volatile over the coming year, which could mean further losses for Unilever.
3. Are western markets giving up on brands?
Brands such as Pond’s, Lipton and Knorr have helped Unilever to generate profitable growth in emerging markets, and the firm’s large brand portfolio is one of the reasons it can justify carrying £14.5bn of goodwill on its balance sheet.
However, in developed markets such as the UK, consumers seem to be losing interest in brands; Unilever’s developed market sales fell by 1.1% during the first nine months of this year.
In contrast, J Sainsbury recently reported that sales of its own-brand ranges were growing twice as fast as those of branded goods, and that its Taste the Difference range is set to deliver double-digit growth this year.
If this trend continues, Unilever’s key advantage — its brand-led pricing power — could dissolve as quickly as one of the firm’s Knorr Stock Cubes.