WEEKLY STOCK COMMENT: UNILEVER
Peter Ball, 16 August 2018
Unilever (ULVR) is one of the world's leading companies in consumer goods, manufacturing around 400 brands which span 14 categories across Food, Home Care and Personal Care, including detergents, deodorants, hair care, ice cream, frozen food and culinary. Brands include global favourites such as Dove, Axe, Sunsilk, Lipton, Surf and Magnum. Over half of Unilever's sales are in the emerging markets.
The re-focussing of the company on innovation and the speed with which they introduce brands into new markets has been a key driver of the turnaround seen in the business over recent years. The proportion of ULVR’s turnover coming from products launched in the last two years continues to be above 30%, and the company has a strong pipeline of new products under development. ULVR now has two of its six strategic laboratories located in emerging markets, with the latest having been built in Shanghai; this reflects their long-term commitment to research and development.
While investors used to think of ULVR as a food company, it is increasingly perceived as a Home and Personal Care company and management is focussed on accelerating growth in these two segments. Home and Personal Care currently account for just under 60% of revenue but given the company’s focus on M&A it’s likely to become much larger. Management view ULVR as a natural consolidator and given the pace of change within the sector, M&A will be a core part of the company’s growth strategy. Over the last few years ULVR has been divesting its fragrance brands to focus on skin and hair care. The company’s acquisition of Alberto-Culver in 2011 (gaining assets such as Alberto VO5, St. Ives, TRESemmé, and Consort) has been very successful. More recent acquisitions in beauty - Dermalogica, Kate Somerville, and Dr. Murad – fit perfectly into its strategy to be a global leader in skin and hair care.
Emerging market growth has stabilised over the last few quarters and remains to be the primary growth driver for the company with sales growth from developed markets still subdued. The long-term opportunity in emerging markets remains compelling. Firstly, emerging market consumption per capita remains well below that of developed markets. Secondly, population levels are also significantly higher in emerging markets, adding further weight to the argument.
Over the long-term, ULVR has provided superior returns to the broader market with a much lower level of risk. We continue to be positive on ULVR given its strong brands, established position, stable cash flows and continued commitment to advertising and promotional spend (growing the brand). We regard ULVR’s earnings as relatively defensive – they sell products consumed on a daily basis, demand for which is typically not impacted by the broader economy. We believe lower risk companies such as ULVR should prove less volatile than the broader market.
The key risks to ULVR include; 1) an increase in the cost of raw materials, 2) acquisition and expansion risk, and 3) ULVR’s high exposure to emerging markets making it more open to currency movements.