2014 has been a positive year for investors in Unilever (LSE: ULVR) (NYSE: UL.US), with shares in the consumer goods company rising by 4% since the turn of the year. This may sound like a rather average gain, but is well ahead of the FTSE 100’s 1% fall over the same time period.
However, with shares in the company now trading on a price to earnings (P/E) ratio of close to 20, are they now too expensive to warrant purchase? Or, would Warren Buffett still buy them at their current price?
Economic Moat
A key aspect of Warren Buffett’s investing style is his desire for a company to have an economic moat. In Unilever’s case, this centres on the stable of brands that it owns. Although on the face of it, ice cream is ice cream and shampoo is shampoo, Unilever’s brands command a significant amount of customer loyalty. Indeed, people across the globe are willing to pay a premium price for perceived better quality and a more reliable product experience through purchasing one of Unilever’s brands.
This shows that Unilever has a distinct competitive advantage over its rivals, since although they can sell the same types of products as Unilever, they are unable to command the same degree of brand loyalty over the short or medium term.
Growth Potential
Clearly, the rate at which a company grows its earnings has a major impact upon its share price. On this front, Unilever seems to have huge potential. That’s because around 60% of the company’s revenues are generated in emerging markets. With the wealth of individuals in emerging markets increasing at a quick pace, demand for Unilever’s mid to premium products looks set to grow in future years. Indeed, evidence of this can be seen in the short run, with Unilever’s earnings forecast to increase by 9% in 2015, which is ahead of the wider market growth rate.
Looking Ahead
Although shares in Unilever are by no means cheap, they do seem to trade at a reasonable price. For instance, while a P/E of 19.8 is above and beyond the FTSE 100’s P/E of 13.7, it’s lower than other global consumer stocks. For example, SABMiller trades on a P/E of 22.4 and, with Unilever having emerging market exposure to at least match that of SABMiller and, arguably, a wider diversity of brands, Unilever looks good value on a relative basis.
So, with a wide economic moat and exceptional growth potential, Unilever appears to be a high quality company that trades at a reasonable price. For these reasons, why wouldn’t Warren Buffett be tempted?