What Does 2016 Hold in Store for Unilever?

December 22nd, 2015 by Trefis Team
-5.68%
Downside
48.07
Market
45.34
Trefis
UL: Unilever logo
UL
Unilever

The year 2016 is expected to be an eventful one for consumer processed goods behemoth Unilever (NYSE:UL). The company is in the midst of solidifying its premium personal care portfolio through small, tuck-in acquisitions that are expected to continue in 2016. [1] On the other hand, Unilever appears to be largely through divesting its under-performing Foods brands, although a few minor disposals are possible in 2016. The company does not have any major inorganic plans for the Home Care and Refreshments segments. Consequently, the focus is likely to remain on Unilever’s Personal Care business in 2016.

Our price estimate of $46 for Unilever is about 10% higher than its current market price.

See our complete analysis for Unilever here

Relevant Articles
  1. Should You Pick Unilever Stock At $50?
  2. Does Unilever Stock Have More Room For Growth?
  3. Unilever Stock Seems Poised For A Jump
  4. Can Unilever Stock Maintain Its Outperformance?
  5. Forecast Of The Day: Unilever’s Foods & Refreshment Revenues
  6. Forecast Of The Day: Unilever’s Foods & Refreshment Revenues

2015: Recap

2015 was a mixed year for Unilever. Its shares plunged by 18% in August following a rating downgrade by Goldman Sachs from ‘neutral’ to ‘sell’. [2] Goldman Sachs’ rating has remained unchanged but Unilever’s shares have since recovered to $42, which is nearly the same level as a year ago.

Unilever’s organic revenue growth remained muted at less than 3% year on year in the first two quarters, but jumped to nearly 6% in the third quarter due to one-time factors. Its as-reported revenue growth has fared better due to currency tailwinds, but the benefits therefrom are expected to ease in 2016.

The highlight of the year was Unilever’s acquisitions in the personal care space. The company announced plans to acquire four premium skincare companies including REN, Kate Sommerville, Dermalogica, and Murad. [3] These acquisitions form the first salvo in Unilever’s trigger-happy acquisition strategy in the premium personal care market. The strategy is intended to not just capitalize on the growing popularity of premium personal care products (Read: Why is Unilever Rushing Towards Premium Personal Care Brands?), but also counter the potential impact of Procter & Gamble’s (NYSE:PG) brand consolidation program. (Read: Are P&G And Unilever Headed In Opposite Directions?)

2016: Personal Care to Take Center Stage

The Skin & Hair Care segment is Unilever’s most valuable segment and accounts for over 30% of its value. Going forward, it is set to take on even more importance as Unilever is planning to shore up its presence in the premium personal care market. The company derives nearly 60% of its revenues from the emerging markets. Thus, until 2014 it could rely upon the relentless growth of the emerging markets to drive its revenues forward. However, the slowdown in 2015 showed that the company needs to look to other avenues for sustainable growth.

The premium segment accounts for about 30% of the global skincare market and its growth is outpacing the category growth. [4] Thus, Unilever has now zeroed in on the premium personal care market as the new growth factor. We believe that the company’s acquisitive streak is likely to continue in 2016 to further strengthen its ‘Prestige’ premium products category.

Unilever’s focus on the personal care market is also designed to preemptively counter the fallout of P&G’s brand consolidation program. P&G, the world’s leading consumer processed goods company, is currently going through a transformational phase wherein it will divest 60% of its brands. Thereafter it will compete in just 10 product categories, out of which it holds leadership position in 7 and the second position in the remaining three. (Read: Are P&G And Unilever Headed In Opposite Directions?) The personal care market will continue to be P&G’s forte, thus intensifying competition in the industry. Unilever’s acquisitions in the segment could potentially act to ward off the stiffer competition from P&G in the coming years.

Pricing and Product Mix Could Drive Margin Improvement

Unilever consistently raised prices through 2015 and the trend is likely to continue next year. [1] Additionally, with the acquisition of premium skincare and ice cream companies, Unilever’s product mix is likely to skew towards higher priced products going forward, resulting in higher margins in 2016. However, Unilever may not be able to sustain the high level of cost savings that it achieved in 2015, which could partially offset the aforementioned margin accretion.

In other segments such as Foods, Refreshments, and Home Care, Unilever may attempt to organically improve its bottom-line through cost savings. The success of such an endeavor will largely depend on the continuation of currency tailwinds and a favorable commodity cost environment. [1]

In summary, we believe that the spotlight will remain on Unilever’s personal care segment in 2016. A few minor divestitures in the Foods business are possible, but focus in the other segments is likely to be on organic margin improvement.

Additional Reading:

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Unilever Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, October 15, 2015 [↩] [↩] [↩]
  2. Goldman Sachs Downgrades Unilever to Sell, Money Flow Index, August 12, 2015 [↩]
  3. Acquisitions and Disposals, Unilever Investor Relations [↩]
  4. Global Beauty Care Market 2014-2018, Research and Markets, October 29, 2014 [↩]