Should you ditch Unilever in favour of fast-growing small-cap Accrol?
Today's update from Accrol (LSE: ACRL) shows that the company is doing all the right things. The tissue specialist (that's kitchen towel, facial tissues and loo roll to you and I) is certainly performing in line with expectations and has excellent growth prospects. But does this mean that it's a better buy than consumer goods peer Unilever(LSE: ULVR)? It's a tough contest against the consumer goods giant. Let's take a look...
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New business wins
Accrol's performance in the first six months of the current financial year shows that its strategy is performing well. It has been able to win new business with existing customers while also gaining new contracts such as the £10m deal with Lidl. Accrol is in the process of installing two high-speed converting lines in its new manufacturing facility. This will significantly increase its capacity and support long-term growth, especially with both discounters and major multiples in the UK.
In fact, Accrol could be a major beneficiary of Brexit. The UK economy could endure a challenging period that may end in inflation being higher than wage growth. This could lead to increased pressure on disposable incomes, which may cause shoppers to trade down to cheaper supermarkets and cheaper brands. This could increase demand for Accrol's products and act as a positive catalyst on its future growth.
Accrol is expected to increase its bottom line by 53% in the current year and by a further 22% next year. This is an excellent rate of growth and yet the market doesn't yet seem to have fully priced it in. For example, Accrol trades on a price-to-earnings growth (PEG) ratio of 0.4, which indicates that capital gain prospects are high.
The outlook for Accrol is brighter than for consumer goods peer Unilever. It's forecast to grow its bottom line by 5% in the current year and by a further 10% next year. This puts Unilever on a PEG ratio of 1.9. While this is attractive on an absolute basis, relative to Accrol, Unilever seems to be significantly overvalued at first glance.
However, Unilever offers a much lower risk profile than Accrol. For starters, it's a much more diversified business, with Unilever selling a wide range of goods that enjoy a high degree of customer loyalty. Unilever also has greater geographical diversity than Accrol, which means that its performance should prove to be more stable over the long run.
Unilever's financial firepower is also more impressive than that of Accrol. This means that Unilever is better positioned to invest for future growth, for example in the M&A arena. And with Unilever having a dividend yield of 3.2% which is covered 1.5 times by profit, it has far superior income potential to Accrol, the latter of which currently pays no dividend.
While Accrol is a worthy investment, Unilever's risk/reward profile is superior. Therefore, selling Unilever to buy Accrol doesn't seem to be a wise move at the present time.
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Peter Stephens owns shares of Unilever. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
