Matt Logan recently interviewed Bill Nygren, the manager of the Oakmark Select Fund (FUND:OAKLX), about his investment process. One of the interesting comments Nygren makes is that he looks for companies that are not only statistically cheap but also likely to have the sum of the dividend and the growth of the business value per share at least match the equivalent metric for the S&P 500.
The second criterion is an attempt to ensure that the he avoids companies that seem inexpensive but deserve to be cheap because they are unable to match the growth of the market. This criterion is particularly interesting when examining Unilever's (NYSE:UN) (NYSE:UL) recent second-quarter report.
Compared to some of its competitors, Unilever looks reasonably priced. Unilever owns many well-known food and personal care brands, such as Dove and Sunlight soap, Hellmann's mayonnaise, Lipton beverages, and Popsicle. (Heck, after I polish off the Breyer's ice cream in my freezer, I may need to use Slim-Fast, both Unilever brands.)
Unilever's trailing price to earnings ratio of just less than 20 -- and significantly better price to operating cash flow ratio of about 13 -- seems reasonable relative to other large consumer-brand companies. Unilever's just higher than Kraft's (NYSE:KFT) PE of 18 but below the 25 and 21 PEs that Proctor & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL) sport.
But according to the second metric, potential growth in shareholder value, Unilever seems to be having problems. The dividend yield approaching 3%, while not up to the standards of some of the companies in the Motley Fool Income Investor, is a good start. And Unilever's earnings, up about 10% year over year, also look good. But the real concern is revenue growth, which year over year was down 3%.
And the problem is not specific to this quarter. For the last few years, Unilever has found growing revenue challenging. After peaking in 2001, Unilever's revenue looks on pace this year to roughly match levels of 1999. Much of this decline is due to Unilever selling off non-core brands to reduce debt and improve margins. But sooner or later, reducing expenses doesn't cut it anymore, and earnings growth requires top-line growth. That's where Unilever may fall short of achieving Nygren's second criterion.
Fool contributor Richard Gibbons owns Unilever and half a gallon of Breyer's strawberry ice cream. He does not own any of the other securities mentioned in this article.
