Unilever Stock is Fully Priced

Unilever is a high quality stock but the firm is going through a period of slightly subpar performance, with sluggish growth raising questions about pricing power

Philip Gorham 26 January, 2017 | 3:55PM
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Unilever's (ULVR) full-year decline in sales of 1% was a whisker below our assumption of a 0.6% decline, but margins were in line with our forecast.

This is a high-quality business with a wide economic moat

Unilever is going through a period of slightly subpar performance, with sluggish organic volume growth raising questions about Unilever's pricing power, but the company retains a firmly entrenched position with retailers, and we still believe this is a high-quality business with a wide economic moat. Nevertheless, with the stock trading at our fair value estimate, at 19 times 2017 earnings, we see limited upside to the shares and recommend waiting for a wider margin of safety.

Fourth-quarter organic sales growth of just 2.2% was another sequential deceleration from the 4.2% achieved in the first nine months of the year, with the slowdown being fairly broad-based across geographies and categories. We believe this is in part due to cyclical factors, and deflation in Europe shaves almost a percentage point from Unilever's normalised organic growth rate. In the medium term, we forecast organic growth of around 4.5%.

In the fourth quarter, volumes fell for the second successive quarter by 0.4%, highlighting consumers' sensitivity to the price increases of 2.6% across the portfolio. This is concerning because we believe Unilever is overly reliant on commoditised categories such as packaged food and mainstream personal care, in which price competition is stiff.

We are retaining our medium-term estimates of above 4% organic growth, however, because we think Unilever's many category leadership positions will allow it to grow at a rate in line with global GDP when inflationary pressures return to the economy.

Unilever's margin performance was solid in the fourth quarter. Thanks to some transactional currency benefits and solid execution on overhead costs, the core operating and gross margins both expanded by 50 basis points. This was down from the 80 basis points of expansion in the third quarter, however, as the return of commodity inflation, particularly in palm oil and energy, limited the gross margin expansion to 50 basis points.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Unilever PLC4,424.25 GBX0.41Rating

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Philip Gorham  

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