Unilever Stock Analysis

Company Overview:

Unilever Inc. is a global, diversified technology company that operates in the following businesses: Safety/Industrial, Transportation/Electronics, Health Care, and Consumer. Unilever develops their products in-house, and thus has an unusually high product development, and research and development costs.

Unilever operates in 3 main business segments: Beauty & Personal Care, Foods & Refreshments, and Home Care.

Investment Information

Unilever’s 5 Step Growth Strategy:

Unilever has developed its own 5 step strategy for future growth:

1. Purposeful Brands: this includes developing their brands in high growth industries such as hygiene, skin care, prestige beauty, nutrition, and plant-based foods.
2. Improved Penetration: in which Unilever plans to make their brands progressive in the context of social issues, this includes improving the health of the planet (decrease emissions), improve peoples health/confidence/wellbeing, contribute too a more socially inclusive workspace/world, and use differentiated science/technology to outperform their competitors.
3. Impactful Innovation: in which they are aiming to accelerate their business in key growth markets like USA, India, China, and other emerging markets.
4. Design for Channels: in which Unilever plans to develop the channels necessary to keep up with the quickly changing business landscape. This includes accelerating pure-play (focusing on one product/industry for each of their brands), further develop their omni-channel eCommerce strategy, develop eB2B (electronic Business to Business) platforms, and drive leadership/innovation through customer insight.
5. Fuel for Growth: which involves Unilever’s capacity for agility and digital transformation, and being a leader/example in diversity, inclusion & values-based leadership

Investment Valuation

Comparable Analyses

By comparing Unilever’s financial ratios (spreadsheet found at the end of this analysis) to that of their publicly listed competition (listed above in the “competitors” section)  I found the following:

PE Ratio

Based off of Unilever’s Price to Earnings Ratio in comparison to their competitors, UL stock should be valued at $68.92/share, which would imply a share price increase of 28%. This is a little high, so I decided to take another comparable.

P/S Ratio

Unilever’s P/S ratio (compared to their counterparts) indicates that the UL stock should have a  fair value of $115.10/share, which would imply an upside potential of 114%. This is very high and somewhat unrealistic, so I decided to undergo one last comparable.

EV/Revenue Ratio

Unilever’s EV/Revenue ratio indicates that their fair value is $67.59/share, which would translate into an upside potential of 26%. All 3 comparable analyses are in agreeance that Unilever is undervalued, however the results vary heavily.

Comparable Valuation

Due to the variability between comparable analyses, I decided to take a weighted average of the 3 comps. I decided on a 40%, 40%, and 20% split between the P/E, EV/Revenue, and the P/S ratios. I decided to do this as the P/E and EV/Revenue results were consistent and more likely to be correct. By doing this I arrived at a final comparable valuation of $77.63/share, which implies an upside of 44%.

DCF

The comparable analyses tell quite a different story than the DCF model will. (Visualization found below.) This is due to the fact that Unilever has plateaued their growth over the past couple years, which make their ratios look low on paper. However, by inputting the necessary data into my DCF model, it arrived at a fair valuation of UL stock of $53.13/share, which implies a slight downside of 1.1% (which essentially means that Unilever is at their fair value according to the DCF).

Dividend Discount Model

My dividend discount model (visual at the end of this analysis) uses the current annual dividend amount in combination with Unilever’s average annual dividend growth (over the past 4 years), and their WACC (as found in the DCF model). By using these metrics, I was able to find Unilever’s fair value to be $63.18/share, which implies an upside of 18%. Once again this is very close to their current fair value, which indicates that Unilever is a decent buy.

Overall Valuation

In order to provide simplicity, I wanted to come to one final, all-encompassing valuation for the UL stock. I did this through taking the average valuation of the Average Comparable, the DCF, and the Dividend Discount Model. By doing this I arrived at a price target for UL of $64.64/share, which implies an upside of 20%.

Investment Plan

My plan for an investment in the UL stock would go as follows:

• Enter into a position below the fair value, preferably at/below $55/share.
• Hold long-term (with dividend re-investment)
• Re-evaluate the position as new data is released (especially their financial reports to see if they can kick-start their sales growth).

Risks

• Financial Performance: In 2020, there were many concerning metrics that arose from their financial statements. Namely, their sales, operating profit, and pre-tax income all declining. If these trends continue, long term investors will start to trim their positions as they do not want to be holding onto declining stocks with grim futures ahead of them.

Catalysts

• Financial Performance: In 2020, Unilever reported an overall bad earnings report as they declined in many areas. However, they were able to save grace as their net income (after tax) and their free cash flows grew. These are two very important metrics in valuations and can help investors to spot a good long-term future in Unilever.