The Investment Column: Confident Unilever is a good bet for the long term

Tullett Prebon; Character Group
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Our view: Buy

Current price: 1,696p

Looking at its asset and product base, it is hard to understand why Unilever isn't much bigger than it is. Sure, a 65 per cent gain for shareholders over the last three years is a decent return, and in normal circumstances most investors would be delighted. But somehow investors always have the feeling that Uni-lever could do better – and in comparison with its main UK listed rival, Reckitt Benckiser, its performance has been sluggish. But the current evidence suggests that the years of underperformance could be coming to an end. The stock managed a decent rally yesterday, although the numbers were in line with forecasts – underlying sales growth in the third quarter slowed down, despite rising 4.5 per cent, as the gloomy summer hit ice cream sales. Pre-tax profit was 24 per cent better at €1.1bn, based on a 4 per cent jump in turnover to €10.2bn.

The numbers were also affected by the implementation of new systems in the US and a sharp increase in commodity prices, most of which was passed on to customers in the form of higher prices. The key driver of growth for Unilever looks to be its emerging markets exposure, which reported a very healthy sales uplift of 11.7 per cent and the company remains confident it will make its full-year estimates.

Unilever has an impressive portfolio of consumer staples – everything from Wall's and Ben & Jerry's ice cream to Dove soap, Hellman's mayonnaise, Signal toothpaste and Surf detergent. A rationalisation of its global branding and manufacturing looks to finally be paying off, and although it is hard to believe that investors would not be better off if the company split itself up, it is at least heading in the right direction.

The shares trade on approximately 16.4 times forecast 2008 earnings. While that is not cheap, it is a discount to Unilever's immediate peers – including Reckitt, Nestlé and Procter & Gamble.

Unilever can still do better – with a fair headwind in food sales and continued management focus on margins and costs, it should be able to close the gap between itself and its higher rated rivals.

Given the negatives in yesterday's numbers, Uni-lever sounds more confident than it has for a long time. There should be more improvement in the pipe-line, and for investors looking for stable, low-risk growth, Unilever looks a good long-term bet. Buy.

Tullett Prebon

Our view: Buy

Current price: 440p

Few firms were licking their lips over the onset of turmoil in the financial markets, but it meant record summer months for interdealer brokers, which cashed in on the ensuing volatility. One of the two biggest players is hoping to build on its success with two key expansion drives outlined this week. Tullett Prebon demerged from Collins Stewart a year ago. The end of 2005 and into 2006 was a period of consolidation, as the group laboured to integrate two legacy dealing platforms, which took longer than expected.

This week it set up a new electronic broking division, to be headed by Paul Hump-hrey, formerly global head of e-business at ABN Amro. While the company doesn't believe voice broking will ever become extinct, it has recognised the core need to invest in its electronic operations to challenge dominant electronic broker, Icap.

Separately, Tullett indicated a geographical expansion strategy, planning to become the first interdealer broker in Vietnam, Kazakhstan and Pakistan next year. The stock looks good value, on a price-to-earnings ratio of 12.3 times 2008 estimates, cheaper than Icap's 16.6 times.

Interdealer broking is an ultra-competitive industry that demands an ability to move quickly. With the no nonsense Terry Smith at the helm, the company is aggressively looking to break Icap's stranglehold on the market, and some believe the investment banks won't discourage more competition. Buy

Character Group

Our view: Buy

Current price: 205p

Any reader who took our advice last year and had a little punt on Character Group should be laughing – the stock has trebled since we first tipped it, after disposals and a refocusing of the company on its core children's toys business.

Although investors could be tempted to bank their profits and move on, yesterday's full-year results hint that there is more upside left in this stock. Turnover rose 36 per cent to £94.5m, operating profit soared 74 per cent to £12.1m, while earnings per share more than doubled to 17.9p.

There is still plenty to get excited about – Character has benefited from its lic-ensed products, including the Dr Who, Scooby Doo and Peppa Pig lines, and it has just won a licence to produce Postman Pat toys.

House broker Charles Stanley is looking for 21p of per share earnings in 2008, putting the stock on a sub-10 times forward multiple. That is still good value, and with conservative forecasts, a rising dividend and Christmas coming, Character ticks all the right boxes for growth investors. There is still lots of potential here. Buy.