Monday, August 31, 2020

Unilever Benjamin Graham value and stock price. Log scale

The Unilever share price (and many other share prices) was quite high around the turn of the century. For the past few years, the share price has been "stuck" around EUR 50. The dividend has been increasing. Sales are increasing in low single digits. 

As Peter Lynch liked to point out, if a company's Earnings per Share doubling, the share price will probably follow. The Earnings per Share increase is partly driven by share buybacks financed by increasing debt. 

Graham Defensive analysis:
SECTOR: [PASS] Unilever is neither a technology nor a 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 €52 000 million, based on 2019 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 €16 400m/€21 000 of 0.8 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 €30 000 million, while the net current assets are - €4 870 million. Unilever fails this test.

LONG-TERM EPS GROWTH: PASS] 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 increased roughly 50% over the past 10 years, therefore the company passes this criterion. 

Earnings Yield: [FAIL] The Earnings/Price (E/P) ratio, based on the lesser of the current Earnings Yield or the  yield using average earnings over the last 3 fiscal years, must be "sufficient", which this methodology states is greater than 6,6%. Stocks with higher Earning Yields are more defensive by nature. Unilever's E/P of 5% (using the current PE) fails this test. 

Graham Number: [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 €7 per share, a Graham Number of €20 per share and fails this test.

Dividend: 1,64/49,3 = 3,3%

Conclusion 2019/2020: The price seems reasonable, but not cheap enough for the Graham Defensive stock screen. 

No comments: