I have long admired household goods company Unilever (LSE: ULVR) (NYSE: UL.US) from a distance, yet have never been seriously tempted to get too close.
I was certainly attracted to its well-managed range of globally recognised consumer brands, which include Dove, Hellman’s, Flora, Magnum, Cornetto, Lipton and Domestos, and its vast opportunities in emerging markets.
But it always looked too expensive, typically trading at around 20 times earnings. I felt Unilever had to keep growing strongly to justify that heady valuation.
Low risk, High Return
And for a while, Unilever did keep growing strongly. When I last reviewed the stock in April, it had just posted five-year share price growth of 107%, against 64% for the FTSE 100.
This was impressive outperformance, given the relatively low-risk nature of the stock, and the ongoing dip in emerging markets.Â
Again, I was tempted.Â
Again, I didn’t buy.
And now the growth has slowed, I suspect I never will.
Russian Reaction
Unilever is being squeezed on two fronts, management admits, thanks to a “further slow-down in the emerging countries whilst developed markets are not yet picking up”.
It still posted halfway decent first-half underlying sales growth of 3.7%, and 6.6% in emerging markets, but enamoured investors had hoped for better.
Group turnover fell 5.5% to €24.1 billion. Currency headwinds didn’t help. Falling product prices are a problem.
Emerging markets were never a one-way bet. Russia was a key part of Unilever’s growth strategy, and although Unilever has largely escaped sanctions fall-out, local sales are slowing anyway, as the country slips into recession.
Growth in China also slowed. Latin America is also problematic.
Brands On The Run
Unilever is also facing challenging conditions in developed markets, with recent price growth negative both in the US and Europe, although volumes did increase slightly.
One big problem is that consumer incomes in the West are growing slowly, if at all. Witness last week’s UK figure showing all-time low wage growth of just 0.6% in the past year.
The essential nature of many Unilever’s goods such as soaps, shampoos, spreads, teas and cleaning fluids does offer some protection, but clearly not enough.
The big supermarkets have been hit by a switch to cheaper, own-label goods, and away from pricier brands. Unilever can’t be immune to that trend.
I’m Keeping My Distance
Given these challenges, and wider market volatility, a drop of 4% in Unilever’s share price in the past three months is far from a disaster, although it isn’t much of a buying opportunity either.
With earnings per share growth set to be flat at best this year, I can’t see any reason to rush into the stock.
If I owned Unilever, I would continue to hold. But the fact that it still trades at a pricey 20 times earnings despite slowing growth opportunities, gives me little reason to lavish money on it right now.