Feel good, look good, get more out of your portfolio *
Most companies saw their margins come under tremendous pressure as the prices of commodities exploded in 2007 and the first half of 2008. In response to this relentless increase in raw materials costs, many companies raised the prices that they charge consumers for their products. Well, as the old saying goes prices rise like a rocket and fall like a feather. The prices of every commodity, from palm oil to wheat, have been at least cut in half over the past year, but I don't recall seeing the prices of many of the items that I buy at the grocery store every week falling by much. Do you? I didn't think so.
This means that margins for consumer products companies are going to improve dramatically in the coming quarters. Every talking head on television over the past year has said to buy consumer staples to weather the current economic slowdown and resulting turbulence in the stock market. As a result, the stocks of companies like Procter & Gamble Co. (PG) and Nestle (NSRGY.PK) have held up fairly well during the recent market carnage.
One stock that hasn't been as lucky, but should still benefit from the same trends of continuing consumer demand for its products and falling commodities prices is Unilever (UN). Unilever currently trades at only 11.5 times trailing earnings, versus a multiple of near 17 for P&G and well over 20 for Nestle.
Headquartered in the Netherlands, Unilever (UN) is a global consumer products company that sells everything from soup to soap. It features such familiar household names as Knorr's Soup, Hellmann's mayonnaise, Skippy peanut butter, WishBone salad dressing, Bertolli pasta, Ben & Jerry's / Breyers ice cream, Lipton tea, Slim Fast, Dove soap, Vaseline, Snuggle fabric softener...the list goes on and on.
These strong brands enable the company generate tremendous cash flow, which it uses to increase shareholder value by repurchasing shares, paying down debt (which is important in today's environment), and consistently raising its dividend...and dividends are an extremely important part of my current investment strategy. Unlike the consistent dividends paid by American companies, the dividends paid by European companies often vary from year to year. So far in 2008, UN has paid two dividends totaling $1.0603, which at today's price is equivalent to 4.5%.
In addition to the previously mentioned trends, Unilever has another potential catalyst that could boost its stock price in the future, Paul Polman. Polman was named CEO of Unilever in September of this year. He is a well-regarded veteran of the industry who has worked at both Nestle and P&G for most of his career. If he can work some of the same magic on UN, its earnings multiple could begin to creep closer to range that its competitors fetch.
Even during the huge run up in commodities prices, the company was able to improve its margins through its "Path to Growth" initiative. Now that commodity prices are falling, watch out. Furthermore, Unilever has been producing outstanding sales growth. It recently posted an 8.3% rise in its third-quarter underlying sales, which was at the top end of its forecast and well above its long-term target range of 3.0% to 5.0%. Improving margins and better than expected sales are a powerful combination that Unilever is not currently being rewarded for.
Yes, consumers are cutting back on spending, but last I checked they weren't cutting back on bathing (yuck) or eating (for some that wouldn't be a bas idea). Add to this falling raw materials prices and a great new management team and I think that Unilever will be a real winner as a long-term buy. I am adding Unilever to my CAPS portfolio today and I'm seriously considering buying shares of it in real life at some point in the future.
* My lame title for this article is a play on Unilever's corporate slogan, "Feel good, look good, get more out of life"