How Unilever Measures Up As a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the Growth at a Reasonable Price, or GARP, strategy. This theory primarily uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its trade price -- a reading below 1 is generally considered decent value for money.

Today, I am looking at Unilever (LSE: ULVR  ) (NYSE: UL  ) to see how it measures up.

What are Unilever's earnings expected to do?

 Metric 2013 2014
EPS Growth 4% 10%
P/E Ratio 20.2 18.3
PEG Ratio 5.3 1.8

Source: Digital Look.

Unilever has delivered solid earnings growth during the past three years, and analysts expect the trend to continue rolling higher during the medium term.

The company currently trades on a PEG ratio in excess of the value benchmark for this year and next, although this is expected to duck much lower next year. Meanwhile, a price-to-earnings (P/E) reading well north of the cheapness measure of 10 also suggests that the stock is expensive at present levels.

Does Unilever provided decent value against its rivals?

 Metric FTSE 100 Food Producers & Processors
Prospective P/E Ratio 16.2 13
Prospective PEG Ratio 3.9 2.5

Source: Digital Look.

Unilever trades at more than double the prospective PEG benchmark set by its rivals in the food producers and processors sector, while it also lags the rest of the FTSE 100 in this regard. Furthermore, the firm's P/E ratio is also well ahead of both groups.

On the face of it, the consumer-goods giant would appear to be extremely expensive at current levels. However, I believe that Unilever's expanding operations in key emerging markets, not to mention the quality and considerable pricing power of its major brands, justifies this premium.

New markets ready to drive growth
I believe that the strength of demand for Unilever's products in developing regions is likely to underpin earnings growth well into the future. The firm announced in April's interims that total revenues advanced to 12.2 billion euros in the first quarter, with underlying sales surging 4.9% during the period.

In particular, organic sales in emerging markets rose 10.4% during January-March, offsetting enduring weakness in Europe -- these regions accounted for 57% of group revenues during the period, and sales rose by double-digits for the eighth successive quarter. And Unilever is building its presence in these areas through potentially lucrative M&A positioning.

In addition, the company's earnings potential comes with an added layer of security through its ability to successfully raise prices and thus defend margins. Indeed, volume growth of 2.2% in quarter one was outstripped by price growth of 2.6% during the period and helped drive the robust sales performance. In my opinion, Unilever is an all-round quality stock worthy of consideration, even at current price levels.

The expert's guide for intelligent investors
If you already hold shares in Unilever, check out this newly updated special report that highlights a host of other FTSE winners identified by ace fund manager Neil Woodford.

Woodford -- head of U.K. Equities at Invesco Perpetual -- has more than 30 years' experience in the industry, and boasts an exceptional track record when it comes to selecting stock market stars.

The report, compiled by The Motley Fool's crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2459454, ~/Articles/ArticleHandler.aspx, 4/16/2014 12:17:33 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 16,373.25 110.69 0.68%
S&P 500 1,856.10 13.12 0.71%
NASD 4,067.00 32.84 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/16/2014 11:53 AM
UL $44.20 Up +0.04 +0.09%
Unilever CAPS Rating: *****
ULVR $2622.00 Down -10.00 -0.38%
Unilever CAPS Rating: No stars

Advertisement