Going into Earnings, Are Unilever Shares a Buy?

Unilever has committed to a turnaround plan and a rationalised product range, but are Morningstar's analysts convinced?

Robert van den Oever 5 February, 2024 | 2:07PM
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Unilever UK Main

Consumer giant Unilever's (ULVR) fourth-quarter results on Thursday are all about sales volume.

At the time, its third-quarter sales growth of 5.2% was, overall, on track. But the fine details weren't. The growth driver was pricing, but volumes were down.

The key now is to show it is capable of turning volume decline around. The quarterly trend in volumes for 2023 shows otherwise, however, with Q1 2023 down 0.2%; Q2 down 0.3%; and Q3 down 0.6%.

Unilever’s own guidance for overall sales growth for the full year 2023 is at least 5%.

Key Morningstar Metrics for Unilever Shares

• Fair Value Estimate: EUR 52/£45.60;
• Current Price: EUR 46,00; £39
• Morningstar Rating: ★★★★;
• Morningstar Economic Moat Rating: Wide;
• Morningstar Uncertainty Rating: Low.

Should I be Cautious About Unilever's Shares?

But Morningstar analyst Ioannis Pontikis is cautious about some of Unilever's categories. He says they are "experiencing elevated competition from private-label and down-trading activities". In plain English, consumers are buying cheaper own-brand products.

In his most recent company report from October 2023 on Unilever, Pontikis noted that, in the third quarter of 2023, "the percentage of Unilever's group activities winning market share over a 12 months time decreased further to 38% from 41% in the second quarter, versus a target of more than 50%".

That was caused by changing stock policies at resellers, pricing dynamics, and consumer shifts in a number of markets. Part of this "disappointing figure" is caused by Unilever's own decision to rationalise its product offering. But Pontikis also sees "elements of higher competitive intensity from lower-priced brands and private-label products, especially in categories that are less brand-driven and more discretionary in nature: like ice cream".

What Are Unilever's Business Plans Now?

Along with its third quarter results, Unilever announced a three-pillar action plan to drive growth: faster growth, productivity and simplicity, and better performance culture.

Pontikis believes "the plan is in the right direction but, as always, successful execution and implementation will determine results.

"Unilever expects the action plan to help the company achieve its multi-year financial goals: underlying sales growth of 3%-5%; modest margin expansion; 100% cash conversion, mid-teens return on invested capital; EPS growth, and an attractive dividend," he says.

Next to volume, pricing is the other sales mix element and the immediate challenge for Unilever and its peers is passing cost inflation on to consumers. Unilever has been successful so far, says Pontikis, "in leading pricing while at the same time minimising volume impact, a function of good demand elasticities and strong brand positions. We expect 2023 to be another year of above-average pricing contribution to organic growth".

At at current share price of around €46 (£39 in London) Unilever is slightly undervalued to Morningstar’s Fair Value estimate of €52.


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About Author

Robert van den Oever  is Research Editor of Morningstar Benelux

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