Investment Column: Uncertainty puts Unilever on hold

Rexam; Diageo
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The Independent Online

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.


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.


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.