Unilever Offers Little Upside Based on Earnings Outlook

Stock price: €20.2 ($29.8)
Conclusion: Top line slowing down at a time when peers are accelerating. Never ending restructuring. Better opportunities elsewhere (cf our Nestle (NSRGY.PK) comment) based on our estimated fair value range of €19-21 ($28-31) per share.

Q3 results: Sales down 2% reported (-1% 9m to €30.1bn), up 3.4% like for like (+4.1% 9m). Adjusted EPS up 5% in Q3 (-6% 9m), down 34% reported. Guidance 2009: “on track to restore volume growth while protecting margins and cash flow for the year”.

Top line growth in Q3 shows a decelerating trend versus H1, despite the positive impact of higher volume. Pricing turned negative in Q3, driven by price adjustments in laundry and in spreads (-2-3%). CEO admitted that Unilever (UN) went too far last year and had to revise pricing in order to stay competitive.
We are still looking for the right balance between pricing and volume which should not take place before mid 2010. CFO warned that pricing should decline even more in Q4 by around -2-3%.

From a margin standpoint, Q3 saw a return to a positive EBIT margin gain (+70bp) thanks to a strong increase in gross margin offsetting higher marketing spending and overheads.
Q4 should also benefit from lower raw material costs (-€500m in H2 versus +1bn in H1) and further costs savings (€1bn YTD, €500m left by the end of 2010). We expect margin pre-restructuring to remain stable at 13.9% of sales for the whole year and adjusted EPS to fall by 7% to €1.29.

Visibility remains limited for 2010. Pricing will continue to impact revenue growth at least for the first half of the year, while volume growth will be held back by very sluggish market conditions. CEO made it clear that markets are tough with no growth in Western Europe and the US and only 3% volume growth in emerging markets. As a result, competition intensity is picking up, which should prevent marketing costs from stabilizing.
Last, the bad news comes from restructuring which will not return to a more normal level next year, due to the costs attached to the integration of the personal care business of Sara Lee.

We continue to think that Unilever is fairly priced and offers little upside based on earnings outlook. The stock trades at 14.4x P/E and 10xEV/EBITDA based on 2010 estimates, while our DCF suggests no upside. In addition, the announcement of new extra restructuring spending in 2010 after €2.5bn spent in 3 years is clearly disappointing, as it will once again reduce the quality of future earnings.

Author's Disclosure: none.

Comments

[Correctamundo:]

Veronique, at what multiple of free cash flow is Unilever currently trading? Do you think this metric is useful in assessing Unilever's relative valuation?

Nov 05 04:17 PM