Unilever (LSE: ULVR) (NYSE: UL.US) is a firm that I rate highly, but when I took a closer look at the consumer goods firm’s final results this morning, I spotted a problem.
The problem wasn’t with the financial results themselves, which were reasonable — the problem is the price that the market expects investors to pay for the company’s shares.
Today’s results place Unilever shares on a trailing P/E rating of 19.0, with a dividend yield of 3.6%. That wouldn’t be too bad if the firm were delivering double-digit earnings and sales growth. But it isn’t.
In fact, Unilever’s underlying sales growth of 4.3% last year is almost exactly the same as the 4.1% sales growth analysts expect from J Sainsbury in the 2013/14 financial year — hardly a growth story.
Although Unilever managed to grow its emerging market sales by a more respectable 8.7% in 2013, 3.9% of this was down to price increases. The remaining 4.8% volume growth suggests that the explosion in middle class demand, that was at the heart of the emerging market growth story, has slowed dramatically.
There is some good news
So why are Unilever’s shares so expensive — and why did the firm’s share price rise by nearly 2% on the day when these results were announced?
One reason is profitability. Although its growth rate is slowing, Unilever remains very profitable, and has so far been able to defend its profit margins. Unilever’s core operating margin rose by 0.4% to 14.1% last year, while gross margins rose by 1.1%.
That demonstrates that Unilever’s brands are still providing decent pricing power. This can be seen in the firm’s free cash flow, which was an impressive €3.9bn last year, completely covering the €2.9bn it paid in dividends.
How does Unilever compare to its peers?
I compared Unilever to Sainsbury above, to highlight Unilever’s pedestrian growth rate, but a more appropriate comparison might be Reckitt Benckiser, which is a similar consumer goods business.
Reckitt shares currently trade on a trailing P/E of around 17.5 and offer a trailing yield of 2.9%. Reckitt is expected to have delivered sales growth of around 5.7% in 2013, while its earnings are expected to rise by less than 1%.
Overall, Reckitt’s valuation is similar to that of Unilever, but I can’t help thinking that both companies are starting to look expensive, as their growth rates slow.