Unilever: I'm Not Buying On This Recent Decline by Ian Bezek
Summary
- Unilever stock fell sharply last week and is now down 15% from its recent highs.
- This correction hasn't made the stock a bargain, however.
- Beware the company's reported trailing earnings; actual operational earnings are significantly less once you back out one-off items.
- At 20x forward earnings, I'm decidedly neutral on Unilever stock.
- This idea was discussed in more depth with members of my private investing community, Ian's Insider Corner. Get started today »
I've owned a chunk of Unilever (UL) stock since 2016. As shares were (until last week) up more than 50% on the portfolio's cost basis, I hadn't given it too much attention lately. It had generally followed the same upward trajectory that so many other consumer staples stocks have done as investors rushed into dividend names for yield amidst plunging interest rates on bonds. More broadly, Unilever is the sort of stock that you can generally throw in the buy and hold camp without too much worry, collecting a slightly larger dividend over time.
However, with the recent sharp drop in the share price after a sales warning, several folks brought Unilever to my attention, and yes indeed, it's time for a fresh look at this leading food and consumer products giant.
The first thing to notice is that while Unilever stock has dropped a fair bit over the past week, and really over the last quarter, it's really not that far down in the grand scheme of things. Shares are just 15% off all-time highs, and are in the middle of the range they've traded in over the past two years. If you like Unilever and were worried about the share price running away from you this past summer, perhaps $57 looks like a great chance to add to positions; over the perspective of the past few years though, the current price isn't particularly unusual.
Additionally, I'd question whether that is really a steep enough decline given the sales warning. Analysts at RBC Europe said Unilever's guidance suggests that Q4 will be the company's weakest in more than a decade. The stock chart doesn't really reflect the gravity of that statement if the analyst is correct.
Not As Cheap As It Looks
A big issue is that trailing earnings are inflated due to one-time items. I saw folks saying the company was cheap because it is selling around 15x earnings versus a 5-year average of 20x using Morningstar data. This looks nice, right?
Source: Morningstar
You can see this same effect by looking at Seeking Alpha's quote page for Unilever. Give it a quick glance and you see the 14.6x trailing PE. What's not to like?
Take a closer look, though, and you'll see that forward earnings are less than $3 per share, which means the forward PE is around 19x. Not such a steal after all.
The trailing earnings aren't representative. Back out one-time items - namely a more than $1/share gain on the sale of its spreads business - and Unilever is selling at close to 21x trailing, 19x forward earnings, which is right around its average in recent years.
...Originally Posted On Seeking Alpha
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