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Questor share tip: Unilever's spending spree makes it look great

Unilever's purchase of Alberto Culver gives it a strong presence in hair products. Buy the shares, says Questor

Unilever

£18.35 +19p

Questor says BUY

This week the consumer products giant said it would buy US hair products group Alberto Culver for $3.7bn (£2.3bn). The company owns brands such as VO5, TRESemme and Simple.

This is the biggest deal that the group has done in a decade – and it looks like an aggressive move to take on rival Procter & Gamble in its own market. This is good news.

The Unilever growth story has been one of emerging markets, so is buying a Western shampoo group strategically sensible?

The simple answer is yes. It increases the weighting of personal care in Unilever's portfolio – and this is its fastest growing category with the best margins. Indeed, the group has new brands which it can push into new emerging markets.

Analysts were positive on the price paid for the operations and reckon it should boost earnings from 2011. Unilever believes that it can generate cost synergies of more than 10pc of Alberto-Culver's sales.

So far this year, 38pc of Alberto-Culver sales were generated by TRESemme and 25pc by VO5. There is still a possibility that a counter bidder will emerge, however.

The group is also in the process of buying Sara Lee's body care business for $1.72bn.

These deals have prompted some analysts to say that they do not expect the group to now launch a share buy-back. At the half-year stage the group has cash and cash equivalents of €2.7bn (£2.3bn) and it is a cash-generative operation.

Unilever shares have underperformed of late, although they have started to bounce from recent lows. However, they are still more than £2 below their recent high of £20.15 seen in December. They hit a low of £16.88 at the end of August.

The long-term growth will come from emerging markets, where more than 50pc of profits are now generated.

The shares were first recommended on November 25, 2008, at £15.03 and they are now 22pc ahead compared with a market up 33pc. They are trading on a December 2010 earnings multiple of 14.5m falling to 13.1 next year. The yield is 4pc and the shares are still a buy for their emerging market growth.