Is Now The Right Time To Buy Unilever plc?

Unilever (LSE: ULVR) (NYSE: UL.US) shares have risen by 142% over the last 10 years, but the consumer goods firm’s share price performance has cooled recently, and Unilever’s share price is down by 13% from the all-time high of 2,862p we saw in May 2013.

Does this decline make Unilever a buy, or are the firm’s shares likely to fall further before recovering?

I’ve taken a closer look to find out more.

Pricey P/E

Let’s start with the basics: how is Unilever valued against its past earnings, and the market’s expectations of future earnings?

Source: Company reports, consensus forecasts

Unilever shares haven’t been cheap for a long time, and they still aren’t.

The firm’s underlying growth and free cash flow compensates to this for some extent: Unilever’s dividend has been consistently covered by free cash flow in recent years (unlike most UK supermarkets, for example) and the firm’s 3.6% prospective yield in line with the FTSE 100 average.

However, Unilever’s sales fell last year, and profits are expected to fall this year. Is the Anglo-Dutch firm’s premium price tag still justified?

A closer look

Unilever’s first-half results were encouraging, with emerging market sales up 6.6% and the firm’s core operation margin stable at a very healthy 14%, despite turnover falling by 5.5% due to currency effects.

However, a year is a short time for a large firm like Unilever, and in my view it’s more important to look at the medium-term trends before deciding whether to buy or sell.

I’ve taken a look at some of the firm’s key fundamentals over the last five years:

Source: Company reports

It’s a pretty well-rounded picture, in my view: shareholders have been well rewarded by a rising dividend, while the firm’s net debt has actually fallen by an average of 2.8% per year.

I don’t see anything to be concerned about here. Looking ahead, City analysts expect more of the same: current forecasts suggest both earnings per share and the dividend will rise by around 6% in 2014 and 2015.

Is Unilever a buy?

As a long-term Unilever shareholder, I’d be happy to top up my holding at today’s prices, but I do think that the company’s shares are a little expensive, even given their above-average growth prospects.

Unilever’s share price has fallen by 5% over the last three months — it’s possible that this fall might continue, providing an attractive buying opportunity later this year or early next year.