Monday, March 13, 2017

Unilever intrinsic value, priced to perfection ?

SECTOR: [PASS] Unilever is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Unilever's sales of €52 713 million, based on 2016 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Unilever's current ratio €13 884m/€20 166 of 0.7 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL]  For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Unilever is €17 860 million, while the net current assets are - €6 282 million. Unilever fails this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for Unilever only increased 11% over the past 10 years, therefore the company fails this criterion. 

P/E RATIO: [FAIL] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. Unilever's P/E of 23 (using the current PE) fails this test. 

PRICE/BOOK RATIO: [FAIL]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Unilever has a book value of €6, a Graham Number of €15 and fails this test.

Dividend: 1,30/45,77 = 2,8%

The Price for Unilever has gone up more than I expected a few years ago. A bid from Kraft Heinz (Buffett / 3G) has helped increase the "quoted value". Not a stock for the Defensive Investor at this price. 

Diagram from 2013:

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