Image source: Unilever plc
I really like the investment case for Unilever (LSE: ULVR). Apparently, so do other investors. Unilever's share price is up 23% this year.
For a long-established blue-chip company in a mature industry selling everyday essentials, that seems like a big leap.
Why I like the investment case
To start, let me explain why I like Unilever's investment case overall.
It operates in an area that is likely to experience high and sustained demand for decades to come (dare I say, maybe even centuries). Shampoo and laundry detergent may not be exciting business areas, but I don't see them disappearing anytime soon.
These markets tend to attract a horde of companies eager to get a piece of the pie. By spending decades investing in creating premium brands like Pigeon and potUnilever has helped it differentiate itself from the rest.
That gives you pricing power, which in turn helps generate profits. Yes, the company's profits have varied in recent years. But they have always been billions of pounds.
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In turn, that helps finance the dividends.
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Reviewing Warren Buffett's Takeover Attempt
Is it a coincidence, then, that Warren Buffett tried to buy Unilever (not some shares, but the whole mess) in 2017?
I would say not at all.
Unilever has all the hallmarks of a classic Buffett investment: a large and durable market, a strong competitive advantage, and demonstrated cash-generation potential.
Understand recent price movements
Buffett failed. That was at £40 per share. But, in the years since, Unilever's share price has repeatedly traded below (in fact, well below) that price.
So why has it increased this year?
The new management could be part of the explanation. Plans to reduce staff at the huge multinational raise the prospect of lower costs, which could boost profit margins.
So could a plan to spin off the ice cream business and focus on areas such as personal beauty, with its attractive margins and no need for a complicated refrigerated supply chain from Horn factory to corner store.
An investor event last week confirmed that it is on track to meet its cost reduction goals and the company also explained its “Growth Action Plan 2030”. The company said it is on track to separate its ice cream business from the rest of the company by the end of next year.
I don't like the share price
Still, that seems like pretty slow progress to me. It suggests that buyers at the right price may not have been anxious (or at Ben & Jerry's).
Meanwhile, growth plans are all well and good (although they may be difficult to achieve in such a mature business), but they are based on current performance, the price-earnings ratio of Unilever shares is already 21.
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I don't think it's outrageous, but it's higher than I'm comfortable with as a potential investor, although I like Unilever's investment pitch.
The company faces risks, from selling the ice cream business too cheaply just to get rid of it, to a weak economy reducing demand for branded products. For now, I have no plans to add Unilever to my portfolio.
