Unilever Downgraded by Analysts

Slowing sales in 2014 have led analysts to downgrade their fair value estimate for Unilever, but the firm retains its wide economic moat due to the strength of its brand portfolio

Erin Lash, CFA 6 November, 2014 | 10:14AM
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Slowing global demand is taking a toll on Unilever (ULVR). Given its vast geographic footprint, foreign currencies have been a notable dark spot, constraining reported sales by around 7% through the first nine months of the year, and as such, we now expect sales to slip nearly 2% in 2014.

However, we view longer-term concerns related to this as overblown. In our view, Unilever's underlying performance, which excludes any foreign currency impact, is more indicative of its long-term trajectory, and we expect foreign currency rates will ebb and flow.

In addition, while negative foreign currency movements disproportionately weigh on emerging markets, we still expect these regions will outpace more mature markets over the near to medium term, reflecting austerity measures in Europe and high unemployment levels and intense competitive pressures, particularly in mature developed markets.

Overall, we think Unilever's grasp of consumer trends and investments related to bringing new products to market and marketing spend will ensure that challenges in emerging markets are ultimately resolved. Longer term we expect annual sales growth will approximate 5%, reflecting the benefits of new products as well as higher prices.

The commodity cost environment is more benign than years past, but we don't suspect this will continue over the longer term, given increasing demand for raw materials in emerging markets. While we're encouraged by the company's commitment to wring additional savings from its cost structure by leveraging its massive scale, we suspect it will continue to reinvest in its business.

After reviewing our discounted cash flow model, we're taking our fair value down to £26.83 from £27.58. The fair value decrease reflects more modest fiscal 2014 top-line expectations. Because of Unilever's global business, our fair value estimate will continue to fluctuate with the exchange rate. Left unhedged, depreciation in the euro will lower the British-denominated investment in the firm's shares.

We assign Unilever a wide economic moat due to the strength of its brand portfolio relative to peers and private-label offerings and its vast scale, which would be costly to replicate.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Unilever PLC4,433.00 GBX0.00Rating

About Author

Erin Lash, CFA  Erin Lash, CFA, is a senior stock analyst with Morningstar.

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