At a crossroads, taking the Unilever way

At a crossroads, taking the Unilever way

Unilever vs Procter & Gamble

Unilever and Procter and Gamble stand as two Goliaths in an oligopolistic market. Both represent investment opportunities demonstrating significant market power and the ability to maintain substantial earnings power.

P&G (Procter and Gamble), best known for brands such as Gillette, Always, and Olay, is the undeniable leader in the home, beauty and grooming conglomerates. They operate in five key segments:

Sales segment breakdown as a percentage of revenue

Fabric and home care (35%)

Baby, Feminine and Family care (25%)

Beauty (18%)

Health care (14%)

Grooming (8%)

This can be further down broken into geographic regions

North America (49%)

Europe (21%)

Greater China (10%)

Asia Pacific (8%)

Latin America (6%)

India, Middle East and Africa (6%)

The success of Procter and Gamble's business model relies on continued growth. This is executed through the continued success of P&G's portfolio of brands and thus facilitated through the creation of innovative products and brands, with R&D currently accounting for 2.49% of revenue.

The management growth strategy is currently outlined as delivering meaningful and noticeable superiority across five key sectors of consumer proposition. The five are product performance, packaging, brand communication, retail execution and customer value.

Beauty:

Beauty represents the profitable core of P&G's business, with name brands such as Pantene, Head and Shoulders and Olay. It is the most profitable part of the business, being a dominant player in the market. Accounting for 20% of the global market share of the hair care market, it also accounts for 6% of the global market for the facial skin market. It accounts 18% of the company’s revenue and 22% of total profit

Grooming:

The grooming segment represents strength in brand names for the company and, once again, a profitable core. With brands such as Gillette, Venus and Brauhn, they can capture 60% of the global razor market. Hold over 25% of the female electric shavers market and over 65% of the female epilators market. Accounts for 8% of the firm’s revenue and 10% of total profit.

Health care:

Health care, through a less profitable part of the business, remains a global market leader. It accounts for 20% of the global share, with brands such as Crest, Oral B and Vicks. Accounting for 14% of revenue and 14% of total profit.

Fabric and Home Care:

The Fabric and Home care market represents the brand's highest sales segments, with Fabric taking 35% of the global market with brands such as Tide, Ariel and Downy. Home care represents 25% of the worldwide market, with brands like Cascade, Dawn, Febreeze and Swifter. Representing 35% of groups total profit and 31% of the firms profit therefore it is the profitable core of P&G.

Baby, Feminine and Family Care:

Diapers and baby wipes account for 20% of the global market share, with Pampers being the biggest brand with $7 billion. P&G's feminine line also represents 20% of the global share, with stakes such as Always and Tampax. P&G's adult incontinence line represents 10% of the worldwide market with brands such as Always Discreet. Represents 25% of total revenue and 23% of profit and is the firms second largest profit centre.

The company's ability to generate exceptional efficiency is demonstrated with an ROIC of 18.06%.

Into the evaluation:

Procter and Gamble have a somewhat enticing valuation, with the P/E ratio currently sitting at 23.53 in contrast to the S&P500 valuation of 25.76 and standing in the shadow of P&G's five years of 34.84. Building upon this, the earnings yield sits at 3.79% vs. the company's five-year average of 3.47%. Furthermore, EV/EBITDA is sitting at 18.34 vs the five-year of 20.04. The FCF per share, in addition, sits at 5.47. Procter and Gamble do represent an enticing valuation however needs more gap in valuation between current and intrinsic that warrants a strong margin of safety. The larger the margin of safety, the greater the ability for unforeseeable errors to be considered without reversing the investment decision.

A look at Unilever:

Unilever (UL) is best known for brands such as Dove, OMO and Comfort. Though not as large as its counterpart P&G it still represents a tremendous value entry point. The company also breaks down its sales segments into five key segments.

Sales segments % of revenue

Beauty and Wellbeing (20%)

Personal care (23%)

Home care (21%)

Nutrition (23%)

Ice cream (13%)

For UL, their business model centres on the ability to build brands "which consumers know, consumers know, trust, like and buy in conscious preference to those of our competitors". Management has outlined its key focuses on sustaining the business model and improving the company's growth. Win with differentiated science and technology, improve the planet's health, improve people's health, confidence and Wellbeing and contribute to a fairer, more socially inclusive world.

Further breakdown of sales segments:

The Beauty and Wellbeing is the second most profitable segment of the business, with brands such as Dove and Vaseline. It accounts for 24% of the company's total profit.

The Personal Care segment represents the brand's most profitable part of the business, with brands such as Rexona and Dove. They account for 28% of the company's total profit.

The home care segment represents 14% of profit for the group; it is a lower margin operation for business, considering it accounts for 21% of revenue. The brands included in this market are Cif, Omo and Domestos.

The nutrition segment account for 25% of the profit of the firm, and it maintains high margins. The brands included in this operation are Hellmans Knorr.

The ice cream segment accounts for 9% of the firm's total profit; it is a lower-margin operation. The business operation understandably makes the least sense in terms of brand integration across markets. The best outcome for management would be a sale or spin off the business in order to focus on the more profitable core of the business. There have been rumours indicating that management would consider a sale of some ice cream brands. Incoming CEO Schumacher might aim to push these ideas forward as he aims to refocus business from Jope's loose strategy.

Into the valuation:

Unilever's P/E ratio currently stands at 15.97 vs the five-year average of 19.91, well below the S&P500 average of 25.76, pointing to a possible undervaluation. The Earnings yield for the company currently sits at 6.26% in contrast to its 5-year average of 5.15. Though EV/EBITDA currently sits at 10.88 vs the 5-year average of 10.04, however is significantly below its counterpart P&G's 18.34. Though the downside in the valuation metrics is FCF/Share currently sits at 2.66, well below P&G.

Is Unilever under-priced ?

From the historical graphs shown, it would be determined that it is certainly underpriced. The revenue growth demonstrates that companies are able to extract similar growth year on year with the occasional reversal. Year-on-year profit growth shows a similar story; however, in 2020, P&G was the clear beneficiary of COVID lockdowns, with profitability soaring as a result.

Looking to net margins as a reason for underpricing, Procter and Gamble's current net margin sits at 17.34% and looking to Unilever's they maintain are much lower net margin of 12.72%. As a result, Procter and Gamble have a higher margin of roughly 27% higher than that of Unilever. However, looking at earnings yield, PE ratio and EV/EBITDA. P&G still demands a 50-60% premium over its counterpart Unilever.

Is debt the answer?

Currently looking at debt maturing next year, P&G as a % of total assets is sitting at 7.39%. In contrast, Unilever is presently sitting in the same position at 7.39%. What about debt that matures further down the line? Looking at total debt maturing in the next five years, Procter and Gambles's debt as % of total assets of 16.51% maturing within that period. However, Unilever has a much higher % of 22.18%.

This is roughly 25% higher than P&G's, but does it warrant the large stock price discount? Looking further into debt, it is tied in bonds that range between 3-6% fixed rates. Therefore Unilever is fine with this recent interest rate environment.

Based on this analysis, there is roughly a 25-30% margin of safety between the current price and intrinsic price, accounting for net margins and current maturing debt.

The catalyst for this investment idea holds up on the transition in management and Peltz's ability to persuade management to improve efficiency. A main driver for a greater investment opportunity would be management selling off businesses that don't drive greater profitability for the core business. However, the fact remains that there is a margin of safety significant enough to warrant an investment opportunity.

Written Sunday 2nd of July

(No date) S&P 500 pe ratio. Available at: https://www.multpl.com/s-p-500-pe-ratio (Accessed: 03 July 2023).

Unilever plc Adr Ul Valuation (no date) Morningstar, Inc. Available at: https://www.morningstar.com/stocks/xnys/ul/valuation (Accessed: 03 July 2023).

Procter & Gamble Co PG Valuation (no date) Morningstar, Inc. Available at: https://www.morningstar.com/stocks/xnys/pg/valuation (Accessed: 03 July 2023).