Should You Pick Unilever Stock At $50?

After a 5% fall this year, Unilever stock (NYSE: UL) looks like it can see higher levels. Looking at a slightly longer term, UL stock is down 17% from levels seen in late 2019. This can be attributed to the company’s P/S ratio, which fell 30% to 2.0x trailing revenues from 2.9x in 2019, partially offset by a 19% growth in revenue per share (RPS) to €23.47 in 2022 versus €19.79 in 2019. The RPS growth was driven by a 16% rise in revenues and its average shares falling 3% over this period.

UL stock has seen a decline of 15% from levels of $60 in early January 2021 to around $50 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. UL has had a poor run, with the stock losing value in each of the last three years. Returns for the stock were -11% in 2021, -6% in 2022, and -5% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that UL underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UL face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, UL stock appears to have ample room for growth, as discussed below.

Unilever’s revenue grew 16% to €60.1 billion in 2022, compared to €52.0 billion in 2019, primarily driven by solid pricing growth. Total sales in 2022 increased 9% y-o-y, led by 11% pricing growth, partly offset by a 2% decline in volume. Similarly, in the first nine months of 2023, the company saw adjusted sales growth of 7.7%, driven by an 8.1% increase in prices, slightly offset by a 0.4% reduction in volumes. Unilever sales can be clubbed into three segments – Personal Care, Food & Refreshments. and Home Care. While personal and home care sales have trended well in recent quarters, food and refreshment sales have been sluggish. Nutrition sales are down 6% (reported basis) for the nine months ending Sep 2023. This can partly be attributed to price adjustments due to higher cost inflation.

Although the company has benefited from pricing growth in recent years, we don’t think it can rely on price increases to drive long-term revenue growth. Consumers tend to shift to cheaper alternatives or reduce their overall spending if the prices continue to rise. Looking at valuation, we find that UL stock has ample room for growth. We estimate Unilever’s Valuation to be $56 per share, about 15% above the current market price. Our forecast is based on a 2.3x forward expected revenue of €24.86 per share in 2023, compared with the last three-year average of 2.4x.

[1] Month-to-date and year-to-date as of 11/29/2023
[2] Cumulative total returns since the end of 2016

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