UNLYF - Unilever: Overvalued And Loaded Up With Saturated Brands

2023-03-22 12:11:17 ET

Summary

• The market overreacted to Unilever's third quarter earnings report, the company's third and fourth quarter earnings reports show management still can't drive organic growth without price increases.
• Unilever's recent price increases aren't sustainable, management can't continually raise prices at a double-digit rate every year.
• The company looks overvalued at 18x likely forward earnings, analysts are only projecting mid-single digit growth for most of the next 4 years.

Strong brands and good investments aren't always linked together. While some companies have been able to continue to grow brands over extended periods of time, most labels eventually hit a saturation point.

Few companies rely more on well-known brands than Unilever PLC ( UL ). This company boasts such labels as Ben and Jerry's, AXE, Comfort, Hellmann's, and DOVE. Unilever operates in three main segments, Beauty and Personal Care, Foods and Refreshment, and Home Care. The company primarily operates in Europe, the Americas, and the Asia-Pacific region. Unilever also sells products in Russia and the Middle East.

This stock has gone a big run since the company reported third quarter earnings in late 2022.

Still, the company has underperformed for most of the last decade.

Unilever's stock is up just 18.93% in the last ten years. The S&P 500 is up over 153.21% during this same time period, and most of Unilever's competitors, such as Procter & Gamble ( PG ), have also consistently and significantly outperformed this European retailer. Procter & Gamble is up 85.57% during this same time period, and Kimberly-Clark ( KMB ) is up 35.57% since 2013.

Unilever is a sell today. The company is up over 20% since management report fairly unimpressive third quarter earnings, and the stock is also pricing in unreasonable growth expectations with a valuation of 18x likely forward earnings. This company's core brands are mature and management has no plan to consistently grow these labels organically. Unilever also won't likely be able to rely on the recent price increases moving forward that have driven most of the company's recent earnings growth.

I wrote about Unilever in a previous article I had published nearly 6 months ago in April, but given that the Unilever has moved up nearly 20% since the company's recent third and fourth quarter earnings reports, I wanted to further discuss the latest news and talk about Unilever's core businesses.

Unilever's decent third quarter earnings report showed revenue growth that was driven almost entirely by recent prices increases put in by management over the last year. Unilever reported third quarter sales growth of 10.6%, and management also raised full-year sales guidance to slightly above 8%. The underlying numbers aren't very bullish though. Unilever said that the company actually saw volumes decline in the third quarter of last year, but the 12.5% price increase more than offset the 1.6% volume decline. The company saw volumes decline in all 3 of their main divisions in the most major regions Unilever operates in, with the only sequential volume growth coming in emerging markets, where management saw a marginal increase in volumes year-over-year of 1.4%.

Unilever's recent fourth quarter earnings report also showed the similarly concerning sign of declining volumes across the company's core divisions. Management stated that while fourth quarter sales growth accelerated to 9%, ahead of the previous forecast of 8%, 11.3% of the sales growth came from price increases, since volumes actually declined for the quarter by 2.1%. The company also raised prices by 13.3% across multiple brands in just the last three months of 2022, and management stated that new price raises are likely to occur in 2023 because of the continued pressure high costs are putting on margins.

Unilever's net margins have also held up solely because of the significant and likely unsustainable price increases that management has put in. This company's net margin is currently 15.56%. Unilever expects net margins to stay between 16-17% in 2023, which is at the high end of the recent range of profitability for this company.

Unilever is well positioned for China and the Asia-Pacific region to open up, and if supply chain and labor shortage issues ease, the company may be able to sustain some modest organic growth without raising prices, but global growth estimates are falling right now as high costs continue to hurt economies worldwide. The IMF recently lowered global growth estimates from 3.4 to 2.9% this year, and the Central banks and governments remain concerned about inflation.

That's why this stock looks overvalued using several metrics. Analysts are only projecting earnings per share growth of 5% a year over the next 4 years, and this company currently trades at 24.3x likely forward GAAP earnings, and 6.08x projected forward book value. The sector median is 19.59x forward GAAP earnings, and 2.29x forecasted book value. Unilever's average five-year valuation is also just 21.28x projected forward earnings. These modest growth projections for earnings per share of this company also include Unilever's $3 billion a year share buyback plan as well.

Even though Unilever's core business model is not cyclical, nearly all of the company's main brands are seeing substantive volumes declines, and management has no plan to grow the core business without raising prices. Unilever has shown that company has pricing power to offset cost increases, but management is not going to be able to continually raise prices at a double digit rate, this retail leader is trading at what likely is unrealistic valuation levels.

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