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Risk-Reward With Unilever

- By Jonathan Poland

While the Facebook (FB) earnings are getting most of the attention today on Wall Street, it would be a lot easier to live without your friends' data feed on the social media giant than it would be to go without washing your hair, cleaning your home or even having dessert. That's why Unilever (UL) after earnings should be in your shopping basket.


Earnings were released this morning for the conglomerate known for household, personal and packed-food products with brands like Axe, Dove, TRESemme and Dollar Shave Club. The numbers weren't well received, hurt by slower growth in developed markets, and shares are now closing in on the lower end of the company's 52-week range.

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Unilever's new CEO, Alan Jope, said that he expects market conditions "to remain challenging" in the coming year, and that sales will grow at the lower end of the target range. Unilever, based in the Netherlands, is suffering a Brexit breakdown, albeit a small one considering its tight trading range.

That said, for the full year, the company generated total revenue of 51 billion euros (down 5% from 2017) and earnings per share of 2.36 euros, which equates to $2.71 per share. With the stock at $52 pre-market, the current earnings multiple is now 2 points lower than the company's historical average.

More importantly, the company has one of the most durable competitive advantages in the world. Again, we take for granted the baseline of care necessary as humans. A lot of it is dependent on products that Unilever sells.

Along with Procter & Gamble (PG), Unilever dominates this space of the market. And, analysts are likely to raise estimates for the current year after today's report. In 2019, the company will likely earn close to $2.90 per share if the euro stays at its current level. At 21x, that would put the price at $61 per share, a 15% price increase.

Dual jurisdictions. Two trading stocks.

The old CEO, Paul Polman, reportedly stepped down because of the inability to uncomplicate Unilever's corporate structure. Unilever has two legal entities, one in the U.K. and one in the Netherlands. The hope was to make one company with one class of shares that is listed in the Netherlands, but British investors (where Unilever is a FTSE 100 firm) have been concerned about the less stringent rules and shareholder rights that the Dutch company would have. Yet, the complexity remains, and there are two symbols to trade -- UN and UL. The British Plc ADR for Unilever (UL) has a slightly better dividend yield.

What happens to the currency after the U.K. exits the European Union in March is up for debate. If it rises back to the 1.25 per-dollar level of the start of 2018, then earnings per share could be as high as $3.16, tacking on another $5 to the price estimate. If it continues down to par with the U.S. dollar, the price could stay right where it is even with solid growth.

Considering the 3.4% yield and tight trading range, it's worth a small holding in most investors' long-term portfolios, especially since the company continues to add value to both the market and its shareholders.

Disclosure: I am not long or short any stock mentioned.

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This article first appeared on GuruFocus.