Valuing Unilever PLC (UL)

In my last post, I discussed the competitive advantage that Unilever has in its global brands. But in addition to having a wide moat, we need to buy stocks at the right price to ensure a wide margin of safety. Today I’d like to share my estimate of Unilever PLC’s (UL) intrinsic value and compare it to the current price of the stock.

To determine intrinsic value, I often like to know how much cash the company is generating for me. Unilever reports what they call “ungeared free cash flow“, and I give them points for using this metric as a target to maximize their value. The ungeared cash flow is equal to the cash flow from operating activities less capital expenditures, less taxation on profit, and taxation on interest and financing income from pensions and similar obligations. Basically this is free cash flow free of tax benefits.

In 2003, Unilever generated €3,939 million in ungeared free cash flow. I estimate that the company will safely grow 3% to 5% in the long term. Assuming a 4% growth rate and using a 10% discount rate, the present value of free cash flows is €65.7 billion. Adjusting for cash and long term debt, the total value to shareholders is €59 billion.

Since Unilever has two classes of shares (PLC and NV), the intrinsic value for PLC shares must be calculated by dividing total value by 6459.4 million combined PLC shares as stated in the Unilever FAQ. Each PLC share is equal to 4 UL ADR shares and the Euro currency needs to be converted to US dollars (1€ = 1.2US$). After crunching these numbers, I get $44 per share as the intrinsic value of UL stock. Using a 25% margin of safety, I am comfortable buying UL at $33 a share.

I actually purchased UL on Tuesday at $33.58 per share. I set up a Marketocracy fund to track this purchase and any future purchases that I make at Fat Pitch Financials. Sorry about the delay in getting this posted, but I’ve been tight on time this week.

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