Unilever

(ULVR) £38.19

Market cap: £95.1 billion

We believe bargain-hunters looking for a high-quality business should consider Unilever (ULVR), the consumer products group whose intrinsic strengths appear underappreciated by the market. Shares in the FTSE 100’s fourth-biggest company by market cap are down around 10% over one year due to inflationary pressures and market share losses for some key brands amid cost-of-living squeeze-induced consumer downtrading.

An underwhelming reaction to new chief executive Hein Schumacher’s plan to ‘drive growth’ and ‘unlock potential’ and allegations of greenwashing have also impacted sentiment towards the stock.

Nevertheless, the Marmite-to-Hellmann’s maker’s wonderful brands, pricing power and remarkably predictable earnings aren’t reflected in a forward price to earnings ratio of 16.2 times, significantly below the high of 27.5 times reached in 2018. Neither are the firm’s exciting long-run emerging markets growth potential or scope for strategic, operational and financial improvements priced in.

Unilever is the fast-moving consumer goods powerhouse behind an enviable collection of household, food and beauty brands used by 3.4 billion people each day and which underpins a highly predictable earnings stream. These brands include Dove soap and Domestos bleach, as well as Comfort fabric conditioner, Cornetto and Magnum ice creams and Hellmann’s mayonnaise to name a few. Deep entrenchment in the supply chains of its retailers is the source of this cash-generative, progressive dividend payer’s wide economic moat.

Following mixed third quarter results, which showed underlying sales growth of 5.2% thanks entirely to price rises, the Rexona-to-Sunsilk maker stuck with its full-year outlook for underlying sales growth above 5% and a modest improvement in underlying operating margin.

Encouragingly, emerging markets delivered both price and volume gains as underlying sales grew 8.3% and a full recovery of the Chinese market offers a potential growth catalyst for 2024 and beyond.

A key area of focus for new broom Schumacher is to arrest market share losses after the percentage of Unilever’s business taking market share slipped to 38% from 41% at the half-year stage.

Schumacher concedes Unilever has not delivered to its full potential but has ruled out any dramatic acquisitions, focusing instead on the 30 ‘Power Brands’ which account for over 70% of the group’s turnover.

Names on the share register who won’t put up with persistent underperformance include respected fund managers Terry Smith and Nick Train, as well as activist shareholder and non-executive director Nelson Peltz.

Given the focus on its biggest brands, recent months have seen Unilever sell off smaller brands including Timotei, Impulse and its ill-fated 2016 purchase Dollar Shave Club. Further disposals, potentially from the slow-growing foods business or a complete separation of the unit through a sale or spin-off, could help unlock value in the future. 

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