Our rating on Unilever N.V. (NYSE: UN). Management is taking numerous steps to meet current demand as well as positioning itself for potential changed future demand. We note that Unilever is currently less profitable than many peers, with an operating margin of approximately 19% compared to a peer group average of 24.5%. We think the shares are suitable as a core global consumer holding in a diversified portfolio.
Unilever typically provides an outlook to investors, focusing on revenue and operating margin trends. After the 1Q earnings release, management withdrew its guidance due to economic uncertainty related to the pandemic. It had also expected continued improvement in the underlying operating margin, strong free cash flows and a 20% operating margin by 2020.
The company is continually refining its portfolio of businesses.
Upon completion, there would be one market capitalization, one class of shares and one global pool of liquidity, while maintaining the Group’s listings on the Amsterdam, London and New York stock exchanges. This will be implemented through a cross-border merger between Unilever PLC and Unilever NV. Unilever NV shareholders will receive one new Unilever PLC share in exchange for each Unilever NV share held.
EARNINGS & GROWTH ANALYSIS
The company has three business segments: Beauty and Personal Care (41% of sales), which includes brands such as Dove soap; Home Care (20%), which includes Comfort fabric conditioner; and Foods & Refreshments (39%), which includes Knorr soups, Hellmann’s mayonnaise, Haagen-Dazs ice cream, and Lipton teas. Recent segment results, excluding the impact of M&A, are summarized below.
In Beauty and Personal Care, underlying sales in 3Q rose a sequentially stronger 3.8%, driven by higher volume. Skin Cleansing performed well, while Skin Care and Deodorants declined.
In Foods & Refreshments, underlying sales rose 3.7% — the first quarterly gain this year.
By geographical area, sales in Asia increased 6% while sales in Europe rose 2.9%. Sales in the Americas increased 4.08%. The company’s adjusted full-year operating margin in 2019 was 19.1%. The increase was driven by operating leverage and efficiencies. Unilever appeared on track to reach its target 20% operating margin by 2020, though the impact of the coronavirus may delay that goal.
FINANCIAL STRENGTH & DIVIDEND
But cash flow covered interest expenses during the year by a factor of 13, and the company’s operating margins are in the high teens, with a target margin of 20%.
Unilever pays a dividend. The current annualized payout is about $1.94. The current yield in U.S. dollars is about 3.3%. We look for modest growth in the dividend going forward.
MANAGEMENT & RISKS
Unilever has a new CEO, Alan Jope. He has replaced Paul Polman, who had held the job since 2009. Mr. Jope joined Unilever in the UK in 1985, and later worked in North America for 14 years and in Asia for 13 years. Before becoming CEO, he served as president of Unilever’s Personal Care business. Graeme Pitkethly is the company’s CFO. Nils Andersen is the Chairman of Unilever.
Unilever had been targeting a 20% operating margin by 2020 with help from zero-based budgeting for brand and marketing investments and a gross-margin improvement program.
Investors in UN shares face risks. The company is continually refining its portfolio through M&A and divestitures. These deals raise integration risks. The UN itself has been an M&A target. In February 2017, Kraft Heinz offered to acquire Unilever for $143 billion in cash and stock. Although Unilever rejected the offer, it could again become an acquisition target. Meanwhile, the failed takeover attempt appears to have spurred management to improve performance.
Unilever, which does business in 190 countries, faces increased competition from startup companies as well as from local rivals in many international markets. It also faces risks from changing economic conditions, unfavorable currency translation, volatile commodity markets, and political uncertainty. The company is also subject to regulations related to the acquisition of local businesses, as well as to a wide range of labor and environmental regulations.
Leading brands include Dove, Lifebuoy, Hellman’s, Knorr, Lipton, and Ben & Jerry’s. The company is based in the Netherlands and the U.K. (where it operates under the name Unilever plc) and has approximately 150,000 employees worldwide.
We note that Unilever is currently less profitable than many peers, with an operating margin of approximately 19-20% compared to a peer group average of 24.5%. However, as management reaches its operating margin goals, we look for earnings to grow faster than the industry average and for multiples to expand over time. Our 12-month target price is $64, or 20-times next year’s earnings, which is closer to the industry average.
On November 24, BUY-rated UN closed at $57.88, down $0.06.