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.
What are Unilever's earnings expected to do?
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|
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.
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Royston Wild owns no shares in Unilever. The Motley Fool recommends Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.