Unilever’s sales growth touched a nine-year high in 2021, but its weak share price is backed by its lower profit margins that analysts fear is an outcome of the categories it serves. Its intense focus on ESG credentials could help the stock’s image but a deeper overhaul may be on the way.
This content has been produced by Opto and was originally published on the Opto Blog.
The share price of consumer goods giant Unilever [ULVR.L] has slumped over the past year and the company has come under criticism in recent months. Its restructuring and intense focus on environmental and social governance (ESG) credentials have failed to cheer investors so far.
Noted fund manager and owner of Fundsmith Terry Smith, who has been called the UK’s Warren Buffett, published a scathing note on Unilever in January after the company failed to acquire GlaxoSmithKline’s [GSK] consumer healthcare division.
Smith compared the acquisition offer a to “near death experience”, adding the business Unilever would have sold if it bought GSK Consumer had outperformed the rest of the business.
“The investor pushback on the proposed GSK acquisition was ferocious, so I would rule out major M&A in the foreseeable future,” Morningstar equity analyst Philip Gorham told Opto.
Ironically, with full-year 2021 sales growth at its highest in nine years and profits also rising, Unilever could be well placed to enact company-wide changes that may strengthen its position in the consumer goods market.
Russia-Ukraine war impact
The Unilever share price has declined 15% in the past year to close at 3,455p on 31 March. This compares unfavourably with the broad-based rise in stock markets over the course of the year.
In fact, while the markets have picked up after the slump seen due to the Russia-Ukraine aggression a few weeks ago, the Unilever stock has remained inert. It is possible that the company’s decision to cease operations in Russia could have some impact on its numbers.
The rise in commodity prices caused by the war in Ukraine could also affect its earnings. It has already highlighted cost inflation as a problem area in the past, which could get worse.
This, however, is just the challenge with its performance over the past year. In his note, Smith points out that Unilever’s returns have been smaller than that of global multinationals like Procter & Gamble [PG] and Nestle [NESN] even over a longer time period.
“Unilever’s problem is that it is in categories that are structurally weak: fragmented, competitive, with low pricing power and commodified products,” Gorham said, adding that “the consumer is simply unwilling to pay more in these categories”.
Changes under way
This does indicate that, despite the encouraging latest figures, the company could do with change. Activist hedge fund Trian Partners built up a stake in the company recently, sparking speculation that it might push a bit of a shakeup at Unilever.
Big changes are already visible. Earlier this year, the company decided to divide its business into five parts: beauty and wellbeing, personal care, home care, nutrition and ice cream. In its press release announcing the change in January, Unilever said that the move is “designed to continue the step-up we are seeing in the performance of our business”.
Focus on ESG
More recently, according to a Financial Times report, Unilever has decided to publish the nutrition scores for its food portfolio against external health metrics. The decision, which was announced in March, was reportedly taken in response to investor pressure to combat obesity. The move was also supported by ShareAction, a charity that works with Unilever shareholders to drive positive change in areas like public health. Ignacio Vazquez, who works with the charity, said “the health profile of the food and drink products it sells remains a blind spot”. This remark is in comparison with Unilever’s otherwise strong focus on sustainability.
ESG is a growing area of focus for not just businesses but also investors and consumers. Unilever’s focus in this area could create greater brand value for the already well-established multinational.
It may, however, be too much of a good thing, as Terry Smith said the company had expanded its ESG initiatives at the expense of profits.
Mixed outlook from analysts
The outlook on the Unilever share price is mixed. According to 12 analysts polled by MarketBeat, the stock has a consensus ‘hold’ rating and an average price target of 3,948.33p, representing a 14.3% upside on the 31 March closing price.
“Ideally, [Unilever] needs to move into stronger categories, where the consumer can be premiumised, as this would drive growth and margins,” said Gorham.
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