Unilever Misses Forecasts but Analysts Remain Confident

Today's disappointing third quarter update shows the consumer goods group is a long way from achieving its growth and profit targets for 2020

Philip Gorham 19 October, 2017 | 1:48PM
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Analysts have confidence in Unilever's (ULVR) ability to deliver on its 2020 growth and profitability objectives. But the company's third-quarter update today – in which the group blamed bad weather in Europe and hurrricanes in the Americas for slowing growth - showed that it remains a long way from achieving those targets.

The consumer goods company’s London-listed shares fell 4% on the news to £43.51. Organic growth of 2.6% in the third quarter on 0.2% volume growth just missed Morningstar equity analysts' forecast, and we have lowered our full-year growth assumptions to the low end of management's 3%-5% guidance.

Although organic growth remains below historical levels, we believe Unilever's entrenched position in the supply chain of its retailers, the source of its strong competitive advantage, or wide economic moat, is intact.

Sales volume weakness in Europe was the key source of underperformance relative to our forecasts. A 2% volume contraction, was worse than we expected, and it was significantly worse than the 2% regional organic growth reported by Nestle (NESN) – although there are differences in the geographical footprint of the segments of the two firms. In common with several other consumer staples companies, Unilever's growth engine is Asia, where growth was 6% and healthily balanced between price/product mix and volumes.

Given a choice between Nestle's problem of volume growth but very little price/product mix, or Unilever's problem of decent pricing but limited volume growth, we would probably take Nestle's situation. The ability to drive volumes in a commoditised portfolio is indicative of a company well entrenched in the supply chain of its customers, the retailers.

Expanding product categories in a difficult consumer and economic environment should strengthen the hand of the manufacturer when negotiating for shelf space. Unilever's effort to expand its brands away from its key markets should improve the effectiveness of its spending on gaining new customers - and support its competitive advantage.

We still have conviction in our medium-term assumptions of 4% organic growth and a 19% profit margin.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Nestle SA93.78 CHF-0.49Rating
Unilever PLC4,495.00 GBX-0.44Rating

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Philip Gorham  

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