In case you missed it, yesterday’s business news was dominated by the conflict between two of the FTSE 100’s biggest constituents: Tesco (LSE: TSCO) and Unilever (LSE: ULVR). Dubbed Marmitegate by some, the UK’s biggest supermarket withdrew Unilever’s products from its website following the latter’s desire to raise prices by 10% in response to sterling’s recent, rapid depreciation.
By 6pm however, it was all over. Both companies released statements confirming that the situation had been resolved. Tesco saw an opportunity to remind everyone that it always puts customers first and Unilever thanked those who had missed it.
Regardless of who blinked first, yesterday’s events were enough to hurt investor confidence. By the close of play, Tesco’s shares were down 3%. Unilever’s shares fared even worse, dropping 3.4%. Given that we’ve only just begun to experience the consequences of Brexit, should investors take this bizarre episode as a sign to reconsider their holdings in either or both companies?
It was all going so well…
The strange thing about this very open dispute is that it came after a period of relative prosperity for Tesco and Unilever.
Tesco’s share price surged over the last couple of weeks thanks to a favourable set of results suggesting the company has turned the corner. Overall like-for-like sales grew 1% in the 6 months to 27 August. In the UK, sales increased by 0.6%. Although profit before tax fell 28% to £71m for the half year, the £17bn cap estimated it would hit £1.2bn in full-year annual operating profit. Having steadied the ship, CEO Dave Lewis (once Unilever’s president of Personal Care) now believes Tesco can achieve profit margins around 3.5%-4% by the end of the 2019/20 financial year. Shares duly jumped to 201p before yesterday’s fall.
Post-referendum, Unilever’s shares have done particularly well thanks to the tendency for investors to seek out businesses with operations outside the UK. Shares had jumped from 3,159p on the eve of the vote to 3,723p before yesterday’s fall. Its trading update for Q3 (released yesterday) showed a 3.2% growth in underlying sales. As CEO Paul Polman declared, the company “continues to demonstrate its resilience by growing competitively and consistently in tough market conditions.“
The clear favourite
If I were forced to choose between the two companies, Unilever would win hands down. Despite its recent run of form, Tesco remains locked in a fierce price war with its listed peers German budget chains Aldi and Lidl. Sure, recent updates from the company have been positive, but there remains a lot to do. Even if Tesco manages to avoid passing costs on to its customers, the accounting scandal that hit the company so hard in 2014 has still not been fully resolved and the possibility of further legal action remains. With so many issues, a forecast price-to-earning (P/E) ratio of 22 and no dividend, those with shorter investing horizons may wish to look elsewhere.
While it must deal with higher import bills, Unilever is a different proposition entirely. Its geographical diversification and enviable portfolio of sticky brands give it the sort of clout even Tesco craves. After all, any supermarket willing to halt sales of top-selling products risks driving consumers away to competitors. Trading on a forecast P/E of 21, Unilever’s shares also come with a yield of 3.2%, something that will attract many investors in this low interest rate environment.
