Action Unilever: a quality company with militant representation

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Poulssen

Unilever APIs (NYSE: UL) is navigating this inflationary environment quite well, trading at 13x EV/EBITDA or 19x forward earnings. It’s a stable, dividend-paying consumer staples company with an activist presence on the board (Nelson Peltz) that’s quite appealing to me in this market. Unilever is an odd beast in that it is not only strong in food with brands like Ola, Magnum and Hellman’s, but also a competitor in the health and personal care category. Its main brands here are Dove and Rexona. I mention this because it’s one of the reasons I feel pretty good about investing in Unilever at multiples that are somewhat average for the consumer staples space.

If I view Seeking Alpha peer stats, Unilever is getting competition Estee Lauder (EL), L’Oreal (OTCPK:LRLCF), Beiersdorf, Coty (COTY) and Shiseido (OTCPK:SSDOY). Placed in this peer group (see below), Unilever’s valuation immediately stands out:

Looking for a Health and Personal Care Alpha Rating

Looking for a Health and Personal Care Alpha Rating (Looking for Alpha)

Whereas if you compare Unilever to a more traditional field of consumer staples companies (see below):

consumer staples valuations

Basic consumption valuations (Looking for Alpha)

Unilever is valued at the industry median on forward P/E and EV/EBITDA. This is after a significant period of underperformance relative to this same sector:

Chart
UL given by Y-Charts

In 2017, Kraft Heinz (KHC) approached the company with a $143 billion takeover offer. In turn, Unilever attempted to acquire GSK’s consumer healthcare business for around $70 billion. The latter now trades as Haleon (HLN), with a market capitalization of around $30 billion.

Ultimately, Unilever abandoned plans for large-scale acquisitions, likely under pressure from several major shareholders. Instead, Unilever sold its tea division and acquired Nutrafol. Nutrafol is the #1 dermatologist recommended hair growth brand in the United States. The sequence of events is exemplary for the way Unilever appears to strategically pivot away from food and towards health. As the percentage of HPC increases and the perception of Unilever as a traditional core consumer changes, the market might start pricing it in a higher multiple.

At the same time, Peltz is likely pressuring the company to improve its margins (this is standard playbook for activists running into successful consumer staples companies that often have inflated cost structures) . Management indicated that this was a target in the last earnings call:

Looking beyond 2022, we expect to improve margin in 23 and 24 through pricing, mix, volume leverage and cost savings, and as market conditions improve. will normalize. And as I said before, we will not set a margin target. That concludes our prepared remarks. And with that, let me hand you over to Richard for Q&A.

If in the coming years margins improve and more revenue can be attributed to HPC, we could see a double whammy. The increased EPS is attributed to an enhanced multiple.

Analyst estimates are between $2.40 and $2.50. At a multiple of 18x (Unilever currently), that’s $43 per share (current share price ~$45). But at a multiple of 30x, it looks like $72. Analysts don’t expect much improvement or growth in margins, as current EPS is $2.37. Meanwhile, the company is running a $3 billion buyback program.

If inflation gets ugly, it could cause margins to deteriorate, but so far Unilever has been able to manage inflation reasonably well. The company has long been active in inflationary geographies like Turkey, South America, and even China. It has the systems in place to accelerate inflation. Management acknowledges that it suffers revenue losses because it leads on price, but argues that this is preferable to a sharp deterioration in margins. As competitors become better at adjusting to inflation, any loss of market share should diminish.

Conclusion

Unilever is executing an interesting strategy that could lead to a revaluation over time. Meanwhile, a successful activist with a track record of success in similar ventures (Nelson Peltz) is on the board. Analysts are pricing very weak EPS growth as the company repurchases $3 billion of stock, works on margins and reasonably manages inflation. The activist approach and the Kraft-Heinz approach suggest that it is possible to improve margins. The market has not liked Unilever’s GSK approach and is wary of management making a big bet-like big bet. It also seems less likely with Peltz on the board. Unilever’s valuation is very average for consumer staples.

In the meantime, it is halfway to becoming an HPC company. I like stocks around $46 as there seems to be good upside potential if things go well. If things don’t go so well, it’s still a defensive name and should continue to command a reasonable multiple. As Unilever restructures, it pays a large dividend. It’s not my first position, but I put money to work in the worst places in this market.

Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these actions.

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