022 was a bad year for many companies… but not for consumer goods companies, which had a remarkably strong year. And this was despite a sharp rise in raw material costs and stretched household budgets because of inflation.
Consumers swallowed big price increases in 2022 without batting an eyelid. Companies in the sector hiked prices by 10% on average in the fourth quarter of 2022, according to Bernstein analysis, with volumes only 2% lower.
It was an even better year for companies in the sector with strong brands that translated into pricing power.
One such company in particular is in the middle of a great turnaround, and poised for profits…
What investors in consumer product companies often do is assess how skillfully and efficiently these firms manage their brands. One good indicator of this is operating profit margins. The better companies have margins above 20% and the best have margins above 30%.
However, I’m interested in the food, home, and personal care group Unilever (UL), where operating profit margins are only at 16%. It has a geographical presence in more than 190 countries and reaches more than 2.5 billion consumers worldwide. Some of its leading brands include Dove, Lifebuoy, Hellman’s, Knorr, Lipton, and Haagen-Dazs.
Unilever was formed in 1930 when the Dutch margarine company Margarine Unie (which had itself been created through a series of mergers in the 1920s) merged with the U.K.’s Lever Brothers Ltd., which had been founded by William Hesketh Lever in 1885 to produce soap and had subsequently diversified into fish, ice cream, and canned foods.
Why Unilever? Because it looks to be poised for a major turnaround, thanks to the entry of a new CEO. Let’s delve into the Unilever situation.
Unilever’s New Broom Needed
The company’s new CEO, Hein Schumacher, is the 51-year old head of a privately-held Dutch dairy cooperative—FrieslandCampina—whose annual revenues are about $12.5 billion. He is backed by activist investor Nelson Peltz, although other investors wanted more of a ‘brand name’ CEO to lead Unilever.
I agree with Peltz’s faigh in Schumacher, based on his history. The new CEO is not what you’d expect from a boring dairy cooperative executive—he completely restructured the company through asset disposals, factory closures, and job cuts.
Schumacher definitely has his work cut for him to turn around the long-underperforming company, as shown in an article from the Financial Times’s Lex team, which found Unilever has delivered volume and product mix growth of only 1.8% a year on average since 2003. That compares unfavorably with Nestle’s (NSRGY) 3%, according to analysis by Jefferies analysts. And that gap has widened significantly since the first quarter of 2020.
The company’s stock has certainly reflected Unilever’s poor performance. Total shareholder return over the former CEO Alan Jope’s nearly four-year tenure through the end of 2022 has been just 14%. That is far below the average return for the sector of 40%, according to Bernstein data.
That’s why its stock sells at a valuation discount to its peers. Unilever trades at 17.6 times 2023 earnings, versus Nestlé at 21.6 times and Procter & Gamble (PG) at 24 times forward earnings multiple.
The FT Lex team says the company’s sluggish volumes may be a reflection of Unilever’s sometimes underwhelming food brands. Unilever has already started tweaking its food portfolio by selling its spreads business in 2018 and its tea unit in 2021. A rumored $3 billion sale of its U.S. ice cream business would help and appears likely.
Schumacher—a food executive who once worked at Heinz Foods (that’s how Peltz first knew him)—should know what assets to keep and what to sell.
Already, thanks to Peltz, Unilever has reorganized its business into five segments: Beauty & Wellbeing (20% of sales), Personal Care (23%), Home Care (21%), Nutrition (23%), and Ice Cream (13%).
And Schumacher does have one big thing going for him: some of Unilever’s brands command consumer loyalty. The company managed to lift prices by 12.5% in the third quarter and 13.3% in the fourth quarter, with only a limited impact on volumes. For all of 2022, underlying sales growth came in at 9%, higher than analysts had expected, as price increases of 11.3% during the year caused sales volumes to drop only 2.1%.
Another plus may turn out to the company’s emerging markets exposure, which accounts for 60% of sales. Its emerging markets business could rebound smartly, driving volume, as economic prospects improve in the developing world and the dollar weakens.
Dividend-wise, Unilever does pay a quarterly dividend. The indicated annualized payout in U.S. dollars is $2.26 and the current yield is about 4.40%. I look for modest growth in the dividend going forward, moving up to $2.35 for 2023 and $2.66 for 2024. The company also has a stock repurchase program. For the full 2022 year, it repurchased 34.2 million shares for 1.5 billion euros.
UL stock is a buy anywhere in the $48 to $55 range.
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Source: Investors Alley