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No. of Recommendations: 4
Unilever (UL & UN) recently popped up on one of the value screens that I follow, and I was a bit surprised that this brand name giant might be selling for a discount price. Then this morning I spotted several news items concerning Unilever, and they didn't sound very promising. They all revolved around a news release by Unilever that revises their earning guidance down from double digit to single digit growth for the year. The cause for the slow down was blamed on poor weather in Northern Europe this summer and weaker consumer confidence in Western Europe. Mr. Market was not happy at all with that announcement and sent share prices down over six percent this morning. Could this possibly be our first fat pitch to come over our plate? Let's take a closer look.

Business Basics
My first stop was over to Unilever's investor relations center to learn a little more about this large European consumer products conglomerate. I was a bit amazed at the number of high quality brand names in Unilever's stable of products. Here are a few of their many (400 plus) high quality brands:

Hellmann's
Knorr
Wishbone
Bertolli
Becel
Country Crock
Slim*Fast
Lipton
Breyers
Ben & Jerry's
Klondike
Popsicle
Birds Eye
Snuggle
Surf
Dove
Pond's
Suave
Close Up
Calvin Klein fragrances
Many of these strong brands dominate their product sector and command premium prices. Unilever's global brands provide the company a major competitive advantage against new entrants in the market.

The company appears to be free of any major legal problems.

Unilever does have substantial pension obligations. They are accounted for using reasonable assumptions. There is also the accounting of stock options, which thankfully have been expensed and are fully included in the financial statements. This is a good indicator that the company practices good conservative accounting.

Return on invested capital has improved from 2002, where it was 9.8%, and in 2003 was 12.5%.

There is still quite a bit more to write about, but I'm out of time. I'll continue the discussion later today. However, I plan on buying this stock this morning while the price is still a bargain.

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 welcome your feedback.

Solidago
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