Over the course of 2014, shares in Unilever (LSE: ULVR) (NYSE: UL.US) have comfortably outperformed the FTSE 100. Indeed, they have risen by 3%, while the FTSE 100 is down 2% year-to-date and investor sentiment in the company seems to be relatively resilient. Can this outperformance continue in 2015? Or, will Unilever underperform the wider index over the next year?
Growth Potential
It’s perhaps surprising that Unilever has beaten the FTSE 100 thus far in 2014. After all, it is expected to post flat profit growth for the full year and relative weakness in emerging markets has caused investor sentiment to be pegged back somewhat. Therefore, with Unilever expected to post earnings growth of 8% in 2015, the market could become a lot more enthused about Unilever next year than it has been in the current year.
Valuation
Clearly, Unilever does not offer exceptional value when compared to the FTSE 100. For example, shares in the consumer goods play currently trade on a price to earnings (P/E) ratio of 20.1, while the FTSE 100 has a P/E ratio of just 14.1. On that basis, it could be argued that Unilever’s share price should underperform the wider index.
However, Unilever’s rating has been much higher than 20.1 and has the potential to increase towards the mid-20s level. Several other consumer goods companies, such as SABMiller, have ratings that are much higher than Unilever’s, with the alcoholic beverage company having a P/E ratio of 22.3, for example. Furthermore, Unilever’s P/E ratio has been at a comparable level to that of its peers in recent years, so there is scope for an upward rerating in addition to earnings growth in 2015.
Looking Ahead
With the short to medium term outlook looking rather uncertain for the FTSE 100, comprising challenges such as the Eurozone remaining relatively weak and the Fed’s asset repurchase programme coming to an end, defensive stocks could prove to be prudent purchases for investors. In this regard, Unilever excels. That’s because it has a beta of just 0.73, which means that its shares should fall by just 0.73% for every 1% fall in the wider index, thereby providing relatively attractive defensive qualities.
However, if the FTSE 100 does move upwards then Unilever could also beat the wider index. As well as the potential for an upward rerating and above-average growth prospects for next year, Unilever is also expected to yield 3.7% in 2015. This is ahead of the FTSE 100’s yield of 3.4% and, with dividends set to grow at a rapid rate in future years, Unilever’s share price could move upwards due to demand from income seeking investors, too.