Pat McKeough responds to many requests from members of his Inner Circle for advice on specific stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions.
In September 2016, Pat looked at Unilever, one of the world’s largest consumer goods companies focus food and home and personal care products.
U.K. company that trades as an ADR on the New York exchange. Unilever is a giant in consumer goods with divisions in Personal Care, Foods, Refreshment and Home Care. Pat looks at the company’s flagging sales in light of a sluggish European economic recovery and examines the impact of Unilever’s extensive restructuring plan. He also provides his recommendation on this stock—and one of our favourite consumer goods stocks.
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Q: Pat: Can I have your advice on whether Unilever plc is a good buy or not? Thank you.
A: Unilever plc (ADR), $48.61, symbol UL on New York (Shares outstanding: 1.3 billion; Market cap: $60.5 billion; www.unilever.com), is one of the world’s largest makers of consumer goods. Asia and Africa supply 43% of its sales, followed by the Americas (32%) and Europe (25%). The company gets 57% of its revenue from emerging markets.
Unilever operates through four businesses:
Personal Care (37% of sales) makes skin and haircare products, deodorants and oral-care goods. Top brands include Dove and Lux (soap), Sunsilk (shampoo), Axe (deodorant), Pond’s (skin cream), Vaseline (petroleum jelly) and Close Up (toothpaste).
Foods (24%) makes a variety of packaged products, including Becel margarine, Knorr soups and Hellmann’s mayonnaise.
Refreshments (19%) makes Lipton teas and Ben & Jerry’s ice cream.
Home Care (20%) makes laundry and dishwashing detergents and other household cleaning products. Its major brands include Sunlight, Comfort and Sif.
In the six months ended June 30, 2016, Unilever’s sales fell 2.6% to 26.3 billion euros from 27.0 billion euros a year earlier (1 euro = $1.48 Canadian dollars). However, excluding currency changes and acquisitions, revenue rose 4.7%. Sales growth of 8.0% in emerging markets, including Asia and Latin America, offset the weak 0.2% growth in Europe and North America. Excluding one-time items, earnings rose 1.3%, to 2.63 billion euros, or 0.92 euros per ADR, from 2.60 billion euros, or 0.91 euros per ADR.
The company operates in competitive markets and must spend heavily on advertising to maintain its market share. In 2015, Unilever spent 15.0% of its sales on advertising and promotions, up from 14.8% in 2014.
The company continues to benefit from its ongoing restructuring, which includes cutting jobs and selling less profitable businesses. Starting in 2018, it expects to cut costs by as much as 1 billion euros each year.
Unilever also continues to make acquisitions; it spent 2 billion euros on purchases in 2015. That’s up from the 424 million euros it spent a year earlier. Most of its recent purchases are personal care brands. They include: Dermalogica, a leading skincare brand used by professional salons and spas worldwide; independent skincare brand Kate Somerville Skincare LLC; REN Skincare; and the Zest and Camay brands from Procter & Gamble.
More recently, the company paid $1 billion for the Dollar Shave Club, an Internet-based firm that sells disposable razor blades. As well, it sells other personal care items such as skincare and styling products. Dollar Shave Club’s sales could reach as high as $200 million this year, up from $152 million in 2015. That business has built a membership of 3.2 million customers since it started up in 2012. Founder Michael Dubin will stay on as chief executive once Unilever completes the deal.
The purchase of the Dollar Shave Club will let the company better compete with Procter & Gamble’s Gillette shaving business. It will also let Unilever cross-sell its other products to Dollar Shave Club’s millions of members as well as others in its database.
The ADRs trade at 22.6 times the $2.15 per ADR the company will probably earn this year. They yield 3.0%.
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Pat McKeough responds to many requests from members of his Inner Circle for advice on specific stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions.
