Should Investors Look for a Buying Opportunity at Unilever While the FTSE 100 Tanks?
LONDON -- It can feel like things are happening so quickly, when the stock market panics. Your shares go from sleepily, steadily climbing for weeks on end, to plummeting in the blink of an eye.
Here at The Motley Fool, we're long-term investors, focused on the underlying business of the companies we invest in. We prefer to let the market's mood swings present us with opportunities, rather than guide our decision making.
So it's usually amid the chaos of a market panic that we find the most attractive opportunities to invest in high-quality businesses, as the good are thrown out with the bad.
Today, I'm weighing up one of the London market's most renowned "high-quality" companies, Unilever , and asking whether the recent market sell-off provides investors with a chance to buy in.
Unilever's shares have taken a bath
Since hitting a new all-time intraday high of 2,908 pence on May 28, Unilever's shares have dropped 12% in a few short weeks. That's quite a severe drop -- over the same time period, the FTSE 100 has fallen 8%.
There are two overriding thoughts I have when comparing Unilever to the overall market. For one, in my view, Unilever has a much higher "quality of business" than the average FTSE 100 company. There's an extent to which I'd rather own Unilever shares for the long haul, instead of one of the gold miners or insurance companies, for example.
Unilever's consumer products, such as Dove, Sure, and Flora enjoy significant pricing power and customer loyalty as a result of their strong brands. Its business is scalable, and enjoys significant potential in emerging markets. Its products fulfill a persistent need for consumers, and operate in an industry with favorable economics, where capital can be deployed for potentially attractive rates of return.
The average FTSE 100 company cannot boast the same long-term global potential as Unilever in my view or match its unusually attractive characteristics.
Fly in the ointment
My second overriding thought, though, relates to Unilever's valuation. The shares are fairly expensive, both absolutely and when compared to the FTSE 100. Sadly, the attractive attributes I mentioned are no secret to investors, who have flocked to own Unilever's shares since 2009.
Simplistically, the company is valued at around 72 billion pounds and is expected to earn roughly 4 billion pounds this year, meaning a forward price-to-earnings multiple of around 18. I estimate that an earnings growth expectation of roughly 8% per year has been priced into Unilever's shares for the next decade. While this premium might not sound like much, it would require Unilever's per-share earnings to double in that time period and compares to 6% annualized growth in the previous 10 years.
It's arguable that investors are offered too small a margin of safety on their investment at today's prices, even after considering the recent sell-off, and the quality of Unilever's business.
It wouldn't be the first time Unilever's shares became too optimistically priced -- after peaking at almost 16 pounds in 1998, it took around 10 years for the shares to recover that level. The culprit that time around was also a lofty expectation of Unilever's potential, as the shares traded for 27 times their earnings that year. The market was right about Unilever's prospects, but investors had to wait for years to see an attractive return on their investment.
The bottom line
I'm a strong admirer of Unilever, and have above-average confidence in the durability of its business. However, I think there's a sensible limit when paying up for shares of a high-quality company. The higher the price, the lower the potential returns an investor can expect to make on an investment.
In my view, the recent 12% slip in Unilever's shares isn't quite enough to make the shares attractive enough for me to invest. So I'd perhaps wait a little longer or instead look for less expensive, high-quality opportunities elsewhere.
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The article Should Investors Look for a Buying Opportunity at Unilever While the FTSE 100 Tanks? originally appeared on Fool.com.Mark Rogers does not own any shares in this article. The Motley Fool recommends Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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