Investment Column: Uncertainty puts Unilever on hold

Rexam; Diageo


Our view: Hold

Share price: 1,443p (+129p)

Investors who put off the decision to buy shares in the consumer goods giant Unilever until today should be kicking themselves.

The group's stock was one of the best performers on the FTSE 100 yesterday, up 9.8 per cent, after it announced better than expected first-quarter results.

Investors should take heart from the fact that the group is performing well in all markets other than Western Europe, and that it is managing to push through price increases.

Yesterday was clearly good for punters but, as several analysts point out, with the company declining to give full-year guidance it is tricky to draw any meaningful conclusions for investors. As such, any punt on Unilever has something of a stab-in-the-dark about it.

Looking at the group in a wider context, it is obvious investors should be attracted to its size and scale, especially in these markets. Watchers at Investec said that yesterday's update was generally good and advised clients to buy the stock, which they say will reach 1,550p, an upside of some 19 per cent on Wednesday's closing price.

We would not be buyers, however. Analysts at Killik argue: "The shares performed poorly following the full-year results in February when the company was unwilling to provide guidance for 2009. Whilst today's statement should provide some comfort, we feel the current rating [12.6 times full-year 2009 price-earnings ratio] leaves the shares firmly in 'hold' territory." We would agree. Hold.

Rexam

Our view: Buy

Share price: 305.25p (-21.5p)

We have been banging on about big, safe and solid investments for some time and even despite the emergence of what some are seeing as green shoots in the equity markets over recent months, we would still favour anything that is not too racy.

And that is why we should naturally be drawn to the drinks can maker Rexam. The group is the biggest in its sector and supplies some of the giants of the drinks industry, such as Pepsi and Coca-Cola. If there is one thing for sure, it is that Rexam is not going to be struggling as a result of customers hitting the wall and not paying bills.

Add to this that the stock has been on the march in recent weeks, up 13 per cent in the last month alone before yesterday's interim management statement, and a solid investment case emerges.

Or does it? The shares were down 6.6 per cent on news yesterday that underlying first-quarter profits were broadly in line with this time last year, supported by positive currency movements. Net debt, at £2.7bn, was lower than planned, but still pretty high and a reason to avoid the stock, according watchers at Killik.

We do not doubt that the group's longer-term prospects are sound and, unlike some, it will certainly emerge from the recession intact. We do worry, however, that the market is not overly keen on the shares, relative to other FTSE 100 companies, and did not seem to be convinced yesterday by the group's assurances that it would have a stronger second half.

We clearly do have reservations, but also think that yesterday's sell-off may represent an opportunity to take the shares as a buy and hold investment. Because the stock trades at a discount to competitors, and because the dividend yield is a healthy 6.4 per cent, we are just about convinced. Buy.

Diageo

Our view: Hold for now

Share price: 881p (+26.5p)

There were drinks all round at the world's biggest distiller, Diageo, yesterday. The company's shares jumped 3.1 per cent after it reconfirmed full-year operating profit growth of between 4 and 6 per cent, even though the first nine months of the year have produced flat sales.

The maker of Johnnie Walker whisky and Smirnoff vodka has suffered from weaker demand from Russia, but that should not worry investors if the analysts at Credit Suisse are to be believed. They argue that the worst is behind the company: "We believe Diageo came to terms with the issue of destocking and down trading earlier and more aggressively than its main competitors, and this will bear fruit going forward now that the destocking cycle is nearing an end," they say, adding that the shares will outperform the peer group.

We do not disagree that the group is solid, but would prefer to see some numbers to support the above thesis. The group's shares are undervalued, but we would be tempted to wait a little longer before piling in. Hold for now.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Life and Style
tech
Arts and Entertainment
Rocky road: Dwayne Johnson and Carla Gugino play an estranged husband and wife in 'San Andreas'
filmReview: In the face of all-round devastation, even Dwayne 'The Rock' Johnson appears a little puny
News
i100
Arts and Entertainment
Bright lights, big city: Melrose Avenue in Los Angeles by dusk
books
Sport
Harry Kane makes Paul Scholes' Premier League team of the season
footballPaul Scholes on the best players, managers and goals of the season - and the biggest disappointments
News
i100
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

The 161-page dossier that exposes Fifa's dark heart

How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

Exclusive interview with Tripoli PM Khalifa al-Ghweil

'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

Raymond Chandler's Los Angeles

How the author foretold the Californian water crisis
Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

Art attack

Chinese artist who posted funny image of President Xi Jinping facing five years in prison
Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

Cher is the new face of Marc Jacobs

Alexander Fury explains why designers are turning to august stars to front their lines
Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

'I'm climbing Ben Nevis for my daughter'

Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
10 best wedding gift ideas

It's that time of year again... 10 best wedding gift ideas

Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
Paul Scholes column: With the Premier League over for another year, here are my end of season awards

Paul Scholes column

With the Premier League over for another year, here are my end of season awards
Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

Liverpool have seen too much tragedy to forget Heysel

Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

Khan’s audition for Mayweather may turn into a no-win situation

The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor