Are Unilever Shares as Dear as Their Products?

The first-half results were not enough to push these shares higher. They look dear and vulnerable to any further disappointing results.

I have not for some time had a look at that great and successful Anglo-Dutch, corporate creation, Unilever, of which Unilever Plc is one doorway into its equity. Decent broking chaps, as I recollect them in the days before computers, used to make a fair living by arbitraging between Unilever Ltd. and Unilever NV. They would constantly follow the prices and chart them, by hand, on long rolls of charting paper which would often go back years. A task of both hand and brain as the late Mr. Karl Marx would have said.

Those were the days of individual watchfulness and enterprise and hand crafted broking; for too long supplanted by computers and investment bankers hoovering up all such market anomalies, in the frequent sweeps of high velocity trading. Those old time arbitragers had something in common with British shipbuilders and British fishermen but did not know it – a link to the dinosaur.

So I shall save my own energy by contemplating such a task and merely look at Unilever shares on the basis on the UK share price, recent results, long term strategy and current valuation.

The Unilever plc share price history

During the preceding five years Unilever Plc. (ULVR) have had a good run and so has the FTSE 100 Index. But unlike the Index, which only managed a 23% increase over that time, Unilever Plc shares rose by nearly 53%. So as every broker is aware, there are good profits and performance to be taken and monetised. If only one could invest in retrospect rather than have to guess the future, the life of the average investor would be so much more satisfying.

Examining the chart, it seems to me that Unilever Plc is still in a five year uptrend; arguably towards the top of it, with some downside before it reaches the five year hypothetical support price of around 2,500p – a possible downside, should it occur, of some 14% below the currents share price of 2,852p. The most recent up trend spurt, which began in 2014, came to an end this spring, and started a new downtrend which was interrupted by the share price upswing on the last set of results, which were well received.

However, Unilever shares have started to come down again, against what looks like some overhead resistance at around 2,900p. Is the share price tracing out a wider and somewhat more volatile price downtrend or will it challenge and go through that share price resistance? My instinct (and that is what it amounts to) is that the share price, at historically high levels, is more likely to trend down, rather than up. As I always say on these occasions, have a look yourself and see if you see what I think I do.

Recent account readings

To contradict my instinctive conclusion, I need to look at some fundamentals. One is the current strategy for the company’s long term growth. That appears to be a switch away from some of its more traditional lower margin sales activities of food into the faster growing, higher margin business of skincare or what some call hair and beauty. Their aim is to acquire and grow products with a growing Chinese market in mind. More sales on higher margins appears to be a winning idea. But there are problems – as there always are.

It will bring Unilever into competition with L’Oreal, the leading and long established incumbent market leader in the segment. Moreover, Nestle has also entered the field of skin care by buying the full equity of such a company from L’Oreal. This sounds no easy contest but one of stiff competition in which super normal skincare profits may be more competed away rather than shared out. One assumes that this will be completion through some heavy promotional costs which, whilst it is happening, tends to put profit margins under pressure. Furthermore, the Unilever CEO has to continue to satisfy market impatience for results from this strategy. Optimism is still there, but a little on the thin side. The analytical children of investment bankers hate to look wrong in their predictions.

Last year’s results

The last set of accounts, published for year to 31 December 2014, showed that cash from net income was up nearly 5%, while operating cash flow was down 12% to Eur.5.54 billion. That was just about sufficient to cover capital expenditure and dividends. I assume that capital expenditure is bound to rise in a period of market expansion, so possibly putting a downward pressure on dividend payments. That should not be unreasonable if it leads to future growth. But investors are a twitchy bunch, none more so than the analytical children of investment bankers. Last year, top line sales revenue was down 2.8%, although the cost of sales figure remained the same as the previous year.

Moreover, earnings per share last year were only up 3% on the market consensus comparability basis and the annual dividend per share reduced by 7%. So, the strategy is grand and probably right but there seems to be a bit of strain financially in pursuing it. Furthermore, I see that earnings per share growth has been sluggish: up 3% in 2013 and up 1% last year. Although the market consensus estimate is for a sudden 14% increase this year, it drops to only a 7% rise for the following year. Clearly not enough in PEG terms for a share selling on an estimated 22 times earnings for this year and an estimated dividend yield of only 3%. The FTSE 100 Index PER and dividend yield are currently 14.6 and 3.65%.

First half results

First half results may have been better than expected but they do not seem much to write home about. Most of the 12% increase in turnover was the contribution of the exchange rate – up 10%. Volume sales were up but by only 1.1%; decent enough but not good enough at this level of share price. Operating profit appears to be down 13% once you adjust for profits on last year’s disposals. The share price has come off since.

Conclusion: I stick to my instinctive conclusion that these are shares that look vulnerable given the high rating against the FTSE lower PER and higher dividend yield. I guess that analysts and brokers would love the opportunity to get big institutional shareholders to deal out on another set of disappointing or questionable results. The shares also look dear on cash ratios and book to value measures.