Unilever
PLC (UL, $54.96): “Pull the (Uni)lever, Kronk!”
By: Quinn
McDaniel, AIM Student at Marquette University
Disclosure:
The AIM 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.
Summary
- Unilever
PLC (NYSE: UL) is one of the world’s largest consumer goods companies
with over 400 brand names in over 190 countries. Headquartered in London, UL
operates through segments such as Beauty and Personal Care (42% of FY20
revenue), Foods and Refreshment (38%), and Home Care (21%).
- With 14 of the top 50 consumer goods brands, UL owns Breyers, Lipton, Axe, Dove, Comfort, Radiant and more.
- Early in the year, UL decided to aim their focus on volume-led competitive growth and delivering underlying operating profit and free cash flow as the best means of value maximization.
- The company is expected to see benefits from persistent at-home food and hygiene consumption this year and recovery in out-of-home channels as the pandemic dies down.
- Challenges created by rising cost pressure are growing issues which have led UL to sub-par top line delivery over the past years.
Key
points: Realizing that the economic toll from the pandemic is deep and
will be long-lasting, management aims to prepare the company by focusing on competitive
growth which is a key part of its overall 4G approach. This approach is about
delivering consistent, competitive, profitable and responsible growth. Additionally,
with a portfolio of on-trend, purpose-led brands, taking those brands to more
places, more people and more quickly is crucial in planning for the company’s outlook
in 2021.
In the first half of the year,
Unilever reported a slight fall in pretax profit ($5.15B for the period,
compared with $5.35B the pervious year) with expectations for full-year margins
to stay flat due to rising costs. The company reported that profitability was
negatively impacted by a little over 6% from currency-related items. Also, the
continuation of restrictions on daily life are impacting UL’s channel dynamics,
sales mix and consumer behavior.
UL continues to make progress on
its strategic change agenda with an acquisition of Paula’s Choice, a cruelty-free
skincare brand. UL sees this as a perfect addition to its Prestige portfolio
with Paula’s strong presence in key growth markets and potential for further
international expansion. The acquisition was completed in early August of 2021
with a reported price of around $2B.
Key competitors of Unilever
include Mars, Johnson & Johnson, Nestle USA and Proctor & Gamble. With significant
competition and changing shopper trends, winning share in each of UL’s
portfolios or geographic segments poses a challenge for all players. UL’s
business model focuses on building brands that the company believes consumers
know, trust, like and buy in preference to those of competitors.
What
has the stock done lately?
After experiencing significant declines
in the beginning of March and then rebounding in July, UL’s stock price has delivered
a -5.28% return since the beginning of this year and a -4.24% return in the
past 4 months or so. With the stocks lowest price at about $52.06, it is
currently trading around $55 after experiencing its high around $61 in May. Its
one-year target is estimated to be about $64.
Past
Year Performance: Unilever’s underlying
performance this past year has shown -5.8% in operating margin and about -2.4% in
earnings per share. Since the beginning of 2020, Unilever has underperformed the
benchmark and shows consistency in this underperformance. While the benchmark
return has risen, Unilever’s continues to fall.
My
Takeaway
Unilever has been in the
international portfolio since March of 2010 and I believe the stock has run its
course. It is difficult to justify UL’s current stock price on its revenue
growth and earnings. A problem I see with UL is that they have an abundance of
brands and should start identifying and disposing of the weaker ones. With
tough competition from companies like Nestle, it is easier these days to start
new brands. Also, with inflation on the rise, this will have to be passed on to
the consumers. Several valuation metrics show that UL may be undervalued which
leads me to believe that this stock should be sold.
