It's easy to get jaded reading corporate press releases. With some companies you never seem to hear any bad news beneath the "record quarter" and "we're very pleased" blather. So, while millions of dollars in shareholder value evaporate into thin air, corporate management pats itself on the back or makes ridiculous excuses for its failures.
Not so with Unilever (NYSE:UL) (NYSE:UN). Management of this European food and consumer goods giant was quite candid in the fourth-quarter presentation. It said the company wasn't getting the job done. Instead of making excuses, passing the buck, or blaming soft sales on things like the high price of gasoline, executives put the burden squarely on themselves.
To be sure, the fourth quarter (and full year 2004) was not very good for Unilever. Despite possessing well-known brands like Dove, Vaseline, Lipton, and Slim-Fast, the company could only manage to squeak out a little less than 1% of top-line growth. Margins were also weak, and net earnings (excluding charges) were down 1%.
In a refreshing dose of candor, Unilever blamed its poor performance (yes, it actually described its own performance as "poor") on two factors. First, it admitted that it allowed short-term financial goals to unnecessarily limit its ability to respond to changing prices and competition. Secondly, it confessed it simply didn't execute well enough and let some brands slip. In other words, competitors like Kraft (NYSE:KFT), Nestle, and Procter & Gamble (NYSE:PG) kicked its tail, and Unilever didn't respond fast enough.
Unilever is taking steps to get growth back on track. In a major move, the company is scrapping its dual-CEO structure and tapping the CEO of Unilever PLC to run the whole business. While the prior dual-CEO concept came about as a result of the company's bizarre structure to avoid taxes (Unilever "UL" is British, Unilever "UN" is Dutch, but they operate as a single entity), scrapping it should be a positive move, as it should make the company more nimble and responsive to change.
Additionally, the company is refocusing its branding and sales approach. A key to this strategy seems to be an examination of what has already been working. For instance, while the company's overall sales are flat, sales in the deodorant space have been pretty strong. Given that the deodorant market is extremely brutal, there are likely some lessons here that the company can apply to its other brands.
And even though sales are sluggish, the company continues to produce cash. For 2004, Unilever produced about $7.1 billion in free cash flow before dividends. What's more, the company managed to post a return on invested capital of nearly 11%.
Unilever looks to be an interesting turnaround opportunity. Though sales are sluggish, cash flow is strong, and the company has a host of well-known brands. What's more, management appears to be quite honest with both itself and its shareholders regarding recent performance. With a P/E below 13, an EV-to-FCF below 7, and a dividend yield above 3%, value-oriented Fools should take a careful look at Unilever.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
