Unilever ULVR will release its fourth quarter and full year 2024 results on Feb. 13. Here is Morningstar’s take on what to look for in Unilever’s earnings and stock.
Analyst: Diana Radu, CFA
What to Watch for in Unilever’s Q4 Earnings
Whether Unilever will manage to maintain its volume growth improvement streak for a fifth consecutive quarter.
The level of pricing growth—expected to be muted in the fourth quarter of 2024 and over the coming quarters.
We expect the 2025 guidance to be aligned with the midterm guidance communicated in the Nov. 2024 Investor Day. This assumes mid-single-digit organic sales growth (with a volume growth contribution of at least 2%) and a modest margin improvement fueled by gross margin. The ongoing productivity program should support the gross margin improvement.
We’ll be looking out for potential updates on the ice cream separation plans. During the Investor Day, the company hinted at a detailed separation update to be communicated in the first quarter of 2025.
Fair Value Estimate for Unilever stock
We have increased our fair value estimate for Unilever’s London-traded shares to GBX 4,750 from GBX 4,380 after reflecting in our model the latest results and a time value of money adjustment. This implies a euro/pound rate of 0.83, 2024 multiples of 20 times earnings and 13 times enterprise value/EBITDA, a free cash flow yield of 3.5%, and a dividend yield of 3%. These valuation multiples are broadly in line with Unilever’s own recent historical valuation range.
Over the last few years, Unilever has been successful in leading pricing while at the same time minimizing volume impact, a function of good demand elasticities and strong brand positioning. We expect 2024 to be a normalization year with pricing contribution to organic growth closer to the long-term average and volume rebounding by around 3%. Although organic growth and its components of volume/mix and price have been in structural decline since 2013, we expect the trend to slightly reverse with our midcycle assumptions at 3.8% versus a long-term average of 3.4% before the pandemic boost (2013-20).
Medium-term EBIT margin is another important valuation driver. Unilever’s underlying EBIT margin peaked in fiscal 2019 at 19.1% as the company actively prioritized profitability over growth through declining investment levels in capital expenditure, R&D, and marketing. With signs of a changing attitude toward investment levels (especially capital expenditure and marketing) and a still significant impact from inflationary pressures, we don’t expect Unilever to reach and surpass previous margin peaks, with our midcycle margin assumption at the 18.6% mark.
Economic Moat Rating for Unilever stock
We think Unilever has a wide economic moat derived from three sources: its entrenchment in the supply chain of retailers (an intangible asset), brand power in certain categories, and a cost advantage. The firm’s broad portfolio of products across multiple categories and supermarket aisles creates a virtuous cycle of competitive advantages comprising intangible assets and cost advantages that new entrants cannot easily replicate. Unilever’s portfolio spans multiple household and personal care product categories as well as food and to a lesser extent beverages, and the firm generates over EUR 60 billion in revenue. This makes Unilever one of the most important suppliers to retailers globally and differentiates it from narrow-moat competitors with smaller product portfolios.
We view the company’s relationships with retailers as an essential part of its wide moat. Since one of the most significant challenges facing consumer goods manufacturers is limited shelf space and distribution capacity in the traditional grocery segment, owners of leading brands can gain and retain points of distribution relative to large peers and smaller competitors by deploying category captains to share local and category-level data with retailers. The category captain recommends the optimal product mix, promotional strategies, and product placement, and both parties share data and analysis. This is a critical competitive advantage for large manufacturers, not only over new entrants and small players, but also in intracategory competition among the leading three or four brands, as it helps the category leader retain prime real estate in the store.
Risk and Uncertainty
We assign Unilever a Low Morningstar Uncertainty Rating. Its portfolio diversity ensures that no single brand can materially affect its excess returns.
The company’s vast financial flexibility and balance sheet strength may lead to value-destructive acquisitions, such as expensive transactions executed in an already pricey market environment. We see this as the most significant risk to Unilever’s value-creation model. Evidence to date has been promising, with Unilever making portfolio adjustments, divesting noncore, low-growth businesses (tea business Ekaterra in 2022, spreads business in 2017) and acquiring high-growth, high-quality brands that complement its current categories/exposures (Paula’s Choice, Liquid I.V., Horlicks, Garancia, and The Vegetarian Butcher).
Historically, the consumption of packaged food has not been significantly affected by economic downturns. However, volume in discretionary and premium categories such as ice cream and homecare has sometimes experienced moderate declines during economic contractions, and consumers usually become more price-sensitive and channel-sensitive.
Bulls say about Unilever Stock
• Unilever has always been focused on the need to reduce costs to meet the challenges of an increasingly competitive environment.
• With about 60% of reported sales derived from emerging markets, Unilever has one of the largest footprints in the developing world of all the global consumer staples manufacturers, which should be a long-term volume driver for the business.
• Unilever possesses one of the highest numbers of category captaincies among global consumer staples companies, cementing its place in customer supply chains.
Bears say about Unilever Stock
• Unilever operates in some of the most competitive categories in consumer staples, where new entrants are filling niche gaps in the market and have proved to be better innovators.
• Middle-market grocers have lost share to e-commerce and hard discounters, which are disruptive forces in the industry because they lower the barriers to entry for niche upstarts.
• The strategy of repositioning the portfolio could lead to value leakage, depending on transaction valuations.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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