Friday, January 15, 2016

26th AIM student equity update (follow up) by Joel Kretz. Unilever (UL) Has the Strategy to Grow in 2016

UL (Unilever ADR): A New Industry Leader in the New Year

By: Joel Kretz, AIM Student 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.


Unilever (UL) is a major global consumer goods company. They are scheduled to report earnings on January 19, 2016.

• On December 16, 2015, Unilever and Acumen announced an $800,000 investment in East Africa to bring more affordable and cleaner cook stoves to smallholder farmers and plantation workers.

• Emerging market sentiment was down for 2015 and will likely remain stagnant in 2016, but is intact for the long run – a moderately positive sign for Unilever.

• Analysts expected Unilever to have outgrown competitor Reckitt Benckiser for 2015 with underlying EPS growth expected to be 9% versus Reckitt Benckiser’s expected 3%.  

• Credit Suisse upgraded Unilever last month to neutral from underperform while Deutsche Bank boosted EPS growth estimates upwards, lending to increasingly better prospects for the company.

• 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 NiƱo. 

• Unilever’s main competitor, Procter & Gamble, would be negatively impacted should the Fed. continue hiking interest rates, pushing the dollar into closer parity with the euro.

• Pair traders are likely to move positions into Unilever and away from Procter & Gamble and Reckitt Benckiser on the back of earnings and central bank announcements.

Unilever (NYSE: UL) continues to be the company in the best position to beat its American competitor, Procter & Gamble (PG). PG’s foreign sales will likely continue to be negatively impacted by a rising USD that typically follows Fed. rate hikes. Should the divergence in monetary policy between the Fed. and ECB widen, the effect will be even more severe. UL is poised to take market share away from PG as a result given the majority of UL’s revenue already come from the United States (13.8%).

To reiterate comments from my last update, UL’s cost of goods sold decreases with falling European rates and PG’s cost of goods sold increases 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 to buy from UL than PG.

What has the stock done lately?

The stock has been trading more actively in recent days than over the past three months (1.7 million shares per day vs. 1.3 million shares per day). This is primarily on the back of data coming out of China in addition to the ongoing commentary coming out central banks in Europe and the United States. About 13.0% of Unilever’s revenue is derived from China. Prior to the “China effect,” it appeared that investors were awaiting further confidence in central bank policy in January Fed. and ECB announcements given the stock had not moved much since mid-October, trading in a range of ~$42.00-$44.00. The stock has taken a hit since the China headlines from last week. Watch central bank moves in the coming weeks as they will impact UL in the short-term. Once clarity comes out of China and 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 1.51% in value and the stock’s total return is 4.5% over the past year. While the stock continues to outperform both the S&P 500 and Russell Global ex US indexes, it continues to be undervalued by Street estimates. The stock’s 52 week price range is $39.08-$46.07. 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 quantitative easing talks, and the acquisition of a new Italian gelato brand on October 1, 2015.

Source: FactSet

My Takeaway
While Unilever’s stock remained relatively stable near the end of 2015, it wasn't until the recent weak Chinese data was recently released that the stock dropped. The one month chart below shows weakness; however, not as much as the Russell Global Index. 

I believe that the market is overreacting to the Chinese data - and given that UL continues to have strong fundamentals based on a product suite that is, at a minimum, relatively inelastic in nature. Many analysts argue that the recent news out of China comes on the back of years of manipulated and manufactured numbers. If this is true, the new Chinese data points should not be alarming for potential or current investors in UL stock because consumer behavior in China will not differ given the numbers have never been as great as the Chinese government has previously stated. Consumers will continue acting the same way, at worst! As a result, the stock is now more undervalued than it had previously been. Furthermore, the company remains in a position to take market share away from its competitors, lending to the likelihood of it being the new industry leader in the New Year.

 Source: Yahoo!Finance

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