Does Unilever Stock Have More Room For Growth?

After a 3% rise this year, Unilever stock (NYSE: UL) is fully valued, in our view. Unilever stock has risen from $50 in early January to $52 now. This marks an in-line performance with the 3% return for the broader S&P500 index. Looking at a slightly longer term, UL stock is down 10% from levels in late 2019. This can be attributed to 1. the company’s P/S ratio, which declined 24% to 2.2x trailing revenues from 2.9x in 2019, partly offset by 2. a 16% rise in Unilever revenue to Eur 60.1 billion, and 3. its average shares outstanding falling 3% to 2.6 billion. Our interactive dashboard, Why Unilever Stock Moved, has more details.

Unilever sales can be clubbed into three segments – Personal Care, Food & Refreshments. and Home Care. The company’s revenue growth over the recent years has been driven by solid pricing growth. Total sales in 2022 grew 9%, led by 11% pricing growth, partly offset by a 2% decline in volume. The volume growth was 1.6% in 2021 and 2020, while the pricing growth was 2.9% in 2021 and 0.3% in 2020. As we look forward, the pricing growth will likely cool down in the near term, while its volume growth may remain low, given the higher inflation and a possible global recession later this year.

Although the company’s sales have risen over the recent years, its underlying operating margin has consistently declined from 18.5% in 2020 to 16.1% in the last twelve months due to higher expenses, including a rise in input costs. The company’s bottom line decreased 8% y-o-y to Eur 2.37 in 2022, led by a 230 bps operating margin contraction. With costs expected to remain elevated and volume growth likely to be adversely impacted in a recession, Unilever is expected to see a decline in earnings in 2023, partly offset by share repurchases. Unilever has Eur 1.5 billion remaining in its current share buyback program for 2022-23.

Looking at valuation, we find that Unilever’s stock is fully valued. At its current level of $52, UL is trading at 2.2x its trailing twelve months’ revenues, compared to the last three-year average of 2.7x. We estimate Unilever’s Valuation to be $52 per share, aligning with the current market price, and represents a 2.2x P/S multiple based on TTM revenues. A slight decline in Unilever’s P/S multiple compared to its historical average makes sense, given the consistent decrease in operating margin and an expected hit on top and bottom-line growth in the near term.

While UL stock looks appropriately priced, it is helpful to see comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for F5 vs. Target.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 3/29/2023
[2] Cumulative total returns since the end of 2016

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