Why I think this tasty growth stock might be better value than FTSE 100 giant Unilever
FTSE 100 consumer goods giant Unilever(LSE: ULVR) released a fresh set of figures to the market this morning, only a week or so after stating it had shelved plans to de-list from London and move to Rotterdam.
While remaining a firm fan of the Marmite-making business, I can’t help but feel that there are better opportunities elsewhere in the market right now. Let me explain.
In the third quarter of its financial year, the FTSE 100 giant achieved underlying sales growth of 3.8%, despite turnover falling 4.8% (to €12.5bn), due to foreign exchange headwinds.
When combined with that achieved over the first two quarters, this now leaves underlying sales growth over the first nine months of 2018 at 2.9% (or 3.1% when the company’s now-offloaded spreads business is included). Assuming things continue to improve, this should allow Unilever to hit its growth target of between 3% and 5% for the full year, alongside improved operating margins.
Commenting on its results, CEO Paul Polman reflected that the company’s performance over the last three months had been achieved despite price increases, highlighting just how powerful the brands in Unilever’s portfolio are. Stating that the firm was “on track” to hit its 2020 goals, he added that its Connected for Growth programme is allowing for the acceleratation of growth in Asia and a shift “into faster growing segments and channels” in all of its markets.
Unfortunately for those already holding, today’s news failed to impress the market. This is understandable, to a point. On 20 times earnings for the current year, it’s unsurprising if some investors are wanting to see a bit more bang for their buck, in terms of earnings growth. For a company this size, however, that’s no easy ask.
For me, it’s Unilever dependability in tough economic times that merits its traditionally high valuation. The forecast dividend yield of 3.6% for next year, based on today’s share price, while not massive, is another reason to stay invested.
For better growth prospects, however, there’s another option.
Still good value
Also reporting today was pizza producer/delivery firm Domino’s Pizza(LSE: DOM). The reaction to its latest trading update couldn’t be more different, with shares up over 8% in value by this afternoon.
A proportion of this rise can surely be attributed to the unveiling of a fresh £25m share buyback by the company, building on from the original £50m programme already completed. Share buybacks are generally good news for owners since they imply that management considers the company undervalued. Based on today’s Q3 numbers, I’m tempted to agree.
Group system sales moved 5.9% higher to £303.3m, with the vast proportion of these generated in the UK and Republic of Ireland. Sales were up 6.1% in the former, supported by 20 new store openings (40 more are in the pipeline, according to CEO David Wild). Following “good operational progress,” a 4.8% rise in system sales in international markets (to £26m) was also reported.
Positively, the company now expects underlying pre-tax profit to be “in the middle of the range of market expectations,” despite concerns over Brexit continuing to impact on consumer confidence.
Trading on 16 times earnings before today, I think Domino’s current valuation represents pretty decent value for the potential growth on offer, even if — with its estate of over 1,200 stores — there are some concerns over just how long this can be sustained.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.