Wednesday, December 16, 2015

2nd AIM student stock update: Unilever ADR (UL) The Company with the Best Opportunity to Disrupt P&G Following the Fed's Interest Rate Increase

Unilever ADR (ticker UL): The Firm with the Best Opportunity to Gain Share vs. P&G as the US Dollar Rises Versus Euro in 2016
By: Joel Kretz, Student Analyst at Marquette University

Image result for unilever logo

Disclosure: The AIM International Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

• Credit Suisse upgraded Unilever to neutral from underperform in December, while Deutsche Bank boosted EPS growth estimates upwards, lending to increasingly better prospects for the company.
• Top shareholder, Manning & Napier Advisors, LLC, and individual insiders increased their respective positions in UL in Q3. 
• Management has indicated that its ice cream brands are poised to benefit from warmer temperatures in North America and the southern half of Europe resulting from El Niño. 
• UL could be heading to new 52-week highs on the back of a rising USD resulting from the Fed rate hike that will likely force the Bank of England to hold off on raising its rates.
• Unilever’s main competitor, Procter & Gamble, will be negatively impacted as a result of the Federal Reserve rate hike driving the USD upward, leaving an opening for Unilever to gain market share.
• Q3 sales results highlight turnover increasing by 9.4%, underlying sales growth of 5.7% (primarily on volume), emerging markets underlying sales growth of 8.4% (primarily on volume), and a positive currency impact of 2.9%.

Unilever (NYSE: UL) is the company in the best position to gain on its American competitor, Procter & Gamble (PG). PG’s foreign sales will likely be severely and negatively impacted by a rising USD that would typically follow a Fed Funds rate hike. Procter and Gamble’s management indicated a few months ago that their Q2 revenue growth experienced a 600 bps deterioration because of the already strengthening USD. UL is poised to take market share away from PG as a result given the majority of UL’s revenue already comes from the United States (13.8%).

UL’s main competitor outside of PG is Nestle, who actually has the highest market share between the three (34.76%); yet its product suite is less correlated with PG and UL’s. PG’s market share is second highest (34.76%) with $83,062 million in revenues. Assuming a 2.9% positive currency impact going forward for UL and a 6% negative currency impact going forward for PG produces a changing market share landscape.

In theory, UL’s cost of goods sold would decrease with falling European rates and PG’s cost of goods sold would increase with rising American rates. When considering the U.S. market, UL produces in Euros, Pounds, and Yen, and sells in USDs. PG produces in USDs and Yen, and sells in USDs. Given the two companies products are close substitutes, people will likely be willing to switch shampoo brands, for example, if it is relatively cheaper for them to buy from UL than PG.

What has the stock done lately?
The stock has been trading more actively over the last month than it has over the last three months (1.4 million shares per day vs. 1.2 million shares per day). This is on the back of ongoing commentary coming out of central banks in Europe and the United States. It appears that investors are waiting to see what the Bank of England’s next move will be after the Fed.’s decision next week given the stock has not moved much since mid-October, trading in a range of ~$42.00-$44.00. Watch central bank moves in the coming weeks as they will impact UL in the short-term. Once clarity comes out of global central banks, the stock should begin rising again based on continued solid fundamental performance and not be on “hold” by traders and investors any longer.

Past Year Performance: UL’s price has increased 4% in value and the stock’s total return is 7% over the past year; but the stock continues to be undervalued by Street estimates given their rising estimates. The stock’s 52 week price range is $38.60-$46.19. Back in August, Goldman Sachs downgraded UL to sell from neutral and Unilever’s bond ratings were adjusted downward slightly by Moody’s. The stock took off in September on strong macro numbers, upgrades on the Street, ECB QE talks, and the acquisition of a new Italian gelato brand on October 1, 2015.

Source: FactSet

My Takeaway
Unilever is poised to take market share away from Procter & Gamble. The top UL shareholder and insiders have been increasing their equity positions which indicates that the stock is undervalued and/or poised to take off. I believe that both are the case given analyst valuations of the stock in addition to factors including, but not limited to, El Niño’s impact on their Ben & Jerry’s brand (and other ice cream/gelato brands), currency impacts, and my observation that the stock price has been on a virtual “hold” as the markets anticipate interest rate moves by global central banks. With the Fed's rate increase it is likely that the Bank of England will hold rates, and with the European Central Bank continue easing its monetary policy (as I predict all will be the case), Unilever’s stock will take off over the course of the next month and well into the New Year. In my opinion, UL is a stronger stock presently than P&G.

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