Steady Earnings Growth Could See Unilever Stock Rise 10% To Regain 2020 Highs

by Trefis Team
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Unilever Group
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Up around 1.25x from its low in March 2020, at the current price of $59 per share, we believe Unilever stock (NYSE: UL) has further upside potential. The stock has risen from $47 to $59 off its March 2020 low, much less than the S&P which increased by around 80% from its low. Further, the stock is roughly at the same level it was at before the pandemic. However, we believe that Unilever stock could rise around 10% to regain its late-2020 high of $64, driven by expectations of steady demand growth and strong Q1 2021 results. Our dashboard What Factors Drove 14% Change In Unilever Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since late-2018 came due to a 3% rise in revenue from $60.4 billion in FY 2018 to $62.4 billion in FY 2020. Net margins dropped from 18.4% to 11% over this period, due to rising SG&A costs and a higher effective tax rate (20.8% in 2018 to 24.1% in 2020). Combined with a 2% drop in the outstanding share count, this led to a 37% drop in EPS from $4.15 in FY 2018 to $2.62 in FY 2020.

Unilever’s P/E (price-to-earnings) multiple jumped from 12.5x in 2018 to 23x by 2020 end, and is currently around the same level. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 affected logistics and supply chain activities. However, rising home and personal care product demand meant that Unilever benefited from the pandemic. This is evident from Unilever’s full-year 2020 earnings, where revenue came in at $62.4 billion, higher than the $58.2 billion in FY 2019. Net profit saw a boost of around 10%, coming in at $7.4 billion, compared to $6.7 billion in FY 2019. Further, Unilever’s recent Q1 2021 trading statement saw turnover drop 1% on a QoQ basis, but this included a negative currency impact of 8%. Underlying sales growth however, came in at almost 6%, driven by around a 5% growth in volumes and 1% in price. Underlying profit growth also rose 1% over this period.

Additionally, with the lockdowns being lifted worldwide and manufacturing and supply chain activities stepping up to pre-pandemic levels, we believe the company will see further revenue and margin growth in the medium term. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Unilever stock can rise around 10% from current levels, to regain its recent highs of $64.

While Unilever appears undervalued, it is helpful to see how its peers stack up. Check out Unilever Stock Comparison With Peers to see how Unilever compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

 

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