Stock of the week: Unilever

Summary

- Unilever is one of the biggest consumer goods companies in the world
- Importance of emerging markets for the company continues to grow
- Margins continue to improve
- The company upheld full-year guidance despite disappointing earnings release
- Unilever (UNA.NL) trades near ATH after recouping slump triggered by earnings miss

Trade conflicts being fought around the world are putting pressure on the global equities. Stock markets seesaw between euphoria and depression on trade-related headlines and investors have a tough time forecasting how the global economy will cope in a few months. Such an uncertain times may be a good moment to take a look at companies with business that is considered somewhat resilient to the drop in economic activity. In this short analysis we will take a look at Unilever, the European consumer goods company, and how it coped in the first six months of 2019.

Share of the emerging markets in Unilever’s total revenue grew in the past few years. Growth prospects in EM countries are generally more upbeat than in the developed world therefore this can be considered a good sign. Source: Bloomberg, XTB Research

Promising geographic breakdown 

Unilever (ULVR.UK and UNA.NL) is the European stock from the consumer staples sector. As the company sells products that are used daily and in similar quantity, the risk of a major revenue plunge during the economic downturn looks limited. On the other hand, the same reason prevents Unilever’s sales from accelerating significantly during the booming economy. As a result, it is often population growth that defines long-term sales growth of the consumer staples companies in a given country. Unilever’s operations reach across 190 countries and as much as 60% of its revenue in the first half of 2019 came from emerging markets. This is a good sign as population growth in the EM countries tends to be robust while developed countries are often subject to adverse demographics. This is also the reason why the share of EM countries in total revenue is increasing and may continue to increase.

Over the remaining part of the analysis we will make use of “underlying” growth metrics, which are measures supplied by the company in its reports and excludes the effects of acquisitions, disposals as well as changing FX rates. Use of such data is justified as Unilever engages in numerous M&A deals and conducts operations across many countries therefore overall picture could be significantly distorted by corporate actions occurring in between subsequent reporting dates. 

For a long time Food & Refreshments was Unilever’s biggest segment by revenue. However, it has changed last year with the sale of spreads business. Source: Bloomberg, XTB Research

Segment overview

Beauty & Personal Care

Beauty & Personal Care segment is by far the company's biggest division in terms of generated revenue. It focuses on manufacturing and marketing of skin and hair care products as well as deodorants. It has generated turnover of €10.7 billion in the first half of 2019 translating into a solid underlying sales growth of 3.3% YoY. Price growth (1.6%) and volume growth (1.7%) had roughly equal contribution to the sales growth. Underlying operating margin increased by around 100 basis points over the past year and sat at 23%. 

Foods & Refreshment

Foods & Refreshment segment is the second biggest one for company and trails Beauty & Personal Care only slightly in terms of sales. Among products manufactured and distributed by this segment one can find for example Hellmann’s mayonnaise or Magnum ice cream brand. Underlying sales growth in this segment reached 1.3% YoY with 1.4% coming from price increases. Volume declined 0.1% YoY in the period. The company blamed weak consumer demand in developed countries for the lacklustre volume. Food & Refreshment segment was also the only one to experience tightening of margins - underlying operating margin decreased around 40 basis points compared to the previous year and reached 18.3%.

Home Care

Home Care segment is the smallest out of three and accounted for around 20.7% of total sales in the first half of the year. However, the segment was the best performing one when it comes to sales growth. Underlying sales growth reached 7.4% YoY with 2.8% contribution from volume growth and 4.5% contribution from price increases. Home Care segment saw the strongest margin expansion out of three - underlying operating margin increased 120 basis points compared to the previous year and stood at 14%.  

While Unilever experienced positive underlying sales growth in the previous reporting periods, a look at revenue shows that growth stalled. This is due to divestments undertaken by the company. Net income spike in the second half of 2018 was a result of sale of spreads business. Source: Bloomberg, XTB Research

Overall performance

Overally, sales of Unilever increased to €26.126 billion in the first half of the year marking an underlying sales growth of 3.3% YoY. This breaks down to 1.2% contribution of volume increase and 2.1% contribution of price increase. However, as we have mentioned earlier it is geographic breakdown that highlights strengths of Unilever. The company achieved underlying sales growth of 6.2% YoY in emerging markets while sales in developed countries declined 0.7% YoY. Weakness was especially apparent in Europe. Underlying operating profit in the first six months of the year reached €5.054 billion and was 1.75% YoY higher. In turn, underlying operating margin jumped from 18.8% in the first half of 2018 to 19.3% now. Net income reached €3.21 billion, slightly below €3.23 billion generated in the first half of 2018.

Unilever has been rising dividend each year since it has switched to paying out quarterly dividends in the fourth quarter of 2008. Taking into account scheduled dividend of €0.4104 for the second quarter of 2019, Unilever’s 12-month trailing dividend yield sits near 2.95%. Source: Bloomberg, XTB Research

One of the highest dividend yields in Euro Stoxx 50 index

Results for the first half slightly missed market’s expectations and caused investors to rush to sell the company's shares. The release was followed by over 7% decline on the Amsterdam Euronext stock exchange. Price moves on the London Stock Exchange were more limited as GBP weakening helped offset lacklustre sentiment towards the stock. Nevertheless, shares quoted on both markets recovered quickly and are now back in the vicinity of all-time highs. In spite of delivering weaker-than-expected performance in the first six months of 2019, Unilever decided to uphold previous full-year guidance of underlying sales growth in the 3-5% range. The company also said that the underlying operating margin should continue to improve in the second half of the year. Unilever also announced that it will pay a €0.4104 dividend per share for the second quarter, which translates into a 12-month trailing dividend yield of around 2.95%. This is one of the highest yields among Euro Stoxx 50 companies.

Unilever (UNA.NL) shares plummeted following the release of the earnings report for the first half of 2019. However, price managed to bounce off the combination of the long-term support zone, 50% Fibo level of the upward move started at the beginning of February as well as the 200-session moving average (purple line). Upward move that followed brought the stock back to the vicinity of its all-time high. Source: xStation5