$UL Stock: Learn how their growth plan can boost their share price

$UL — Unilever Stock Analysis:

Company Overview:

$UL — 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 their 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

Recent News: Departure of Leena Nair:

On December 13 th2021, Unilever announced the departure of their Chief HR Officer Leena Nair. Who is set to leave the company sometime this month (January 2022) as she will be assuming the role of Global CEO of Chanel. Leena worked at Unilever for the majority of her career (30 years) progressing from the role of Management trainee in 1992, all the way up to Chief HR Officer in 2016. This is a big loss for Unilever, and they will need to find someone else to assume her role later this month as she leaves.

Retirement of Ritva Sotamaa:

On November 30 th, 2021, Unilever announced that Ritva Satamaa will be retiring from her role as Chief Legal Officer & Group Secretary come March of 2022. This is another big loss that Unilever will have to accommodate for. However, with multiple high-ranking management roles open at Unilever, they can use this unfortunate circumstance to make big changes in their organization and business to propel it into the future. Unilever has already filled this spot with Maria Varsellona who was previously the Chief Legal Officer at Nokia.

Departure of Marc Engel:

At the same time that Unilever announced the retirement of Ritva Statmaa, they also announced the departure of Marc Engel in April of 2022. Marc is the current Chief Supply Chain Officer at Unilever and has had a 30 year long career working with Unilever. Marc will be succeeded by Reginaldo Ecclissato, who was previously the Executive VP of Mexico, Central America, and the Caribbean.

Sale of Ekaterra:

On November 17 th2021, Unilever announced the sale of one of their subsidiaries “Ekaterra” to CVC Capital Partners for $5.1M USD (converted from Euro’s). Ekaterra is the world’s leading tea business and includes brands such as Lipton, Pukka, and PG Tips. This sale signified Unilever’s desire to grow their business by selling their slow growing tea business, to fuel the development of their other subsidiaries in higher growing industries. The completion of this sale is expected in the second half of 2022.

ESG Initiatives:

• Climate Action: Unilever plans to have net-zero emissions for all of their products by 203, cut their GHG emissions by 50% by 2030, eliminate emissions in their operations by 2030, and replace fossil-fuel derived carbon with renewably derived carbon for their cleaning/laundry products by 2030.
• Protect Nature:Move to a deforestation-free supply chain by 2023, regenerate 1.5M hectares of land, forests, and oceans by 2030, 100% sustainably sourced agricultural crops, implement water stewardship programs in 100 locations by 2030, and make 100% of their ingredients biodegradable by 2030.
• Plastic Reduction: Unilever plans to reduce 100,000 tonnes of “virgin plastic” by 2030, recycle 25% of their plastic used by 2025, collect/process more plastic than they sell by 2025, 100% reusable/compostable packaging by 2025, and maintain zero waste to landfills.
• Equity, Diversion, and Inclusion: Foster an equitable/inclusive culture by eliminating bias and discrimination through their practices and policies, have diverse representation at all levels of leadership, increase their share of employees with disabilities to 5% by 2025, and increase diversity in their advertising campaigns.
• Raise Standards of Living: Ensure that all employees earn at least a living wage by 2030 and helping small and medium sized businesses to grow their businesses by 2025.

Management Team:

Alan Jope (Chief Executive Officer): Alan Jope has been serving as the CEO of Unilever for 3 years and 1 month. Prior to this, Mr. Jope was the president of the Beauty & Personal Care segment of Unilever for 4 years and 4 months. Mr. Jope’s time at Unilever extends back to 2001, where he joined the team as the COO of the North American Home & Personal Care segment at Unilever. Mr. Jope graduated from the University of Edinburgh with a Bachelor of Commerce, and then went on to Harvard Business School for 1 year post-grad where he received his degree in General Management.

Graeme Pitkethly (Chief Financial Officer): Graeme has been serving as the CFO, and Executive VP of Unilever for 6 years and 4 months, and 7 years and 7 months, respectively. Prior to this Mr. Pitkethly was Unilever’s Senior VP of Global Markets, Group Treasurer, and Head of M&A among other roles. Mr. Pitkethly has been working at Unilever since 2002. Prior to this Graeme worked at other high level management roles at the likes of PwC and FLAG Telecom.

Conny Braams (Chief Digital and Marketing Officer): Conny has worked at various roles in Unilever over the course of 32 years and 1 month. Conny started out as a product manager for one of Unilever’s subsidiaries “Unox& Cup-a-Soup”. Over the next 14 years Conny continue to progress in regional management roles until 2002 where she became VP of Business Unit Spreads & Cooking Products in Netherlands. After 2 years in this role, Conny moved on to VP of Corporate Communications & Sustainability for Unilever’s European Segment. The next large progression came 4 years later, when she accepted the role of Senior VP of Asia, Africa, and the Middle East (commonly referred to as “EMEA”). Conny assumed this role for 5 and a half years until she became the Executive VP in Europe’s Home Care Segment, and Executive VP of Middle European operations. Last;y, Conny moved up the rankings again when she landed the role of Chief Digital and Marketing Officer in early 2020.

Marc Engel (Chief Supply Chain Officer): Mr. Engel started working at Unilever in 1990 as an Operations Manager. Marc stayed in this role for 8 years before moving up to Corporate Strategy. Mr. Engel was incorporate Strategy for 11 months before he became the VP of Supply Chain (Ice Cream) in Brazil for 2years. Mr. Engel then leveraged this experienced to become the managing Director for the Ice Cream Segment, before leapfrogging again to the VP of Supply Chain in Europe for Spreads, Dressings, and Olive Oil in 2004. Marc jumped in the rankings again in 2008 when he landed the role of Chief Procurement Officer, where he would continue to work for the next 5 years and 8 months. After this, Marc progressed to the Managing Director for East Africa and Emerging Markets for 2 years, and then Chief Supply Chain Officer in 2016.

Nitin Paranjpe (Chief Operating Officer): Like many others, Nitin started his career at Unilever in the late 1900’s (1987). Nitin started out as a management trainee for 8 months before moving up to Area Sales Manager, Brand Manager, and then a Regional Manager by 1996. By the turn of the century, Nitin became an Assistant to a Unilever Chairman, and a Member of the Executive Committee. His next big move was to Executive Director of Home and Personal Care on 2006, where he gained 2 years experience before transitioning into CEO of Hindustan Operations, and EVP of South Asia in 2008. Nitin worked in this position for 5 and a half year before progressing to President of the Homecare segment and Member of the Unilever Leadership Executive. Nitin assumed this role for 4 years and 3 months before moving up yet again to President of Foods and Refreshment in 2018. Nitin worked this role for 1 year and 4 month before he was given the opportunity to become Chief Operating Officer in May of 2019.

Richard Slater (Chief R&D Officer): Richard is the only one of these members of management that does not have a rich history at Unilever, instead Mr. Slater worked elsewhere until 2019 where he landed the role of Chief R&D Officer at Unilever. Mr. Slater started out his career at Boots Healthcare, where he was an R&D manager for 7 years until 2006. In 2006, Richard landed the role of R&D Director for various segments of Reckitt Benckiser over the course of 8 years and 8 months. At his time of departure from Reckitt Benckiser, Mr. Slater had the role of R&D Global Group Director, which he leveraged to land the position of Senior VP, Head of R&D of GlaxoSmithKline’s (GSK) consumer healthcare segment. Mr. Slater worked here for 4 years and 8 months before using this experience to transition into the role of Unilever’s Chief of R&D.

Competitors:

In order to undergo the comparable analysis, we need to get an idea of their closest competitors. These competitors must operate in the same space, operate in similar geographies, be of similar market cap, and have valid financial ratios. Using this criterion, I cam up with the following.

• $EL — Estee Lauder: Estee Lauder Inc. manufactures, markets, and sells skin care, makeup, fragrance, and hair care products worldwide. The company offers a range of skin care products, (moisturizers, serums, cleansers etc.); and makeup products, (lipstick, foundation, brushes etc.). It also provides fragrance products in various forms comprising eau de parfum sprays (cologne, perfumes, candles etc.); and hair care products (shampoo, conditioner, sprays etc.). Some of their most notable subsidiaries include Estee Lauder, Clinique, Jo Malone London, and The Ordinary.
• $CL — Colgate Palmolive: Colgate-Palmolive manufactures and sells consumer products worldwide. The Oral, Personal and Home Care segment’s products include toothpaste, toothbrushes, mouthwash, bar and liquid hand soaps, shower gels, shampoos, conditioners, deodorants, detergents, and cleaners. The Pet Nutrition segment offers pet nutrition products for everyday nutritional needs; and a range of therapeutic products to manage disease conditions in dogs and cats. Their most notable companies and subsidiaries include Colgate, Palmolive, Irish Spring, Speed Stick, Softsoap, and Ajax.
• $KMB — Kimberly-Clark: Kimberly-Clark manufactures and markets personal care and consumer tissue products worldwide. The Personal Care segment offers baby products, feminine care products, under their well-known subsidiaries such as, Pull-Ups, Kotex, Depend, and Poise, (among others). The Consumer Tissue segment provides facial and bathroom tissues, paper towels, napkins, under the Kleenex, Scott, Cottonelle, and other brand names.
• $CHD — Church & Dwight Co: Church & Dwight develops, manufactures, and markets household, personal care, and specialty products in the United States and internationally. The company offers cat litters, carpet deodorizers, laundry detergents, and baking soda, as well as other baking soda based products under the ARM & HAMMER brand; condoms, lubricants, and vibrators under the TROJAN brand; stain removers, cleaning solutions, laundry detergents, and bleach alternatives under the OXICLEAN brand; battery-operated and manual toothbrushes under the SPINBRUSH brand; home pregnancy and ovulation test kits under the FIRST RESPONSE brand; depilatories under the NAIR brand;.

Financial Information:

• Yearly Financial Performance (Good): In 2020, Unilever was able to increase their net income after tax by 0.8%, increase their net cash flow (from operations) by 11.7%, and increase their free cash flow by 26% YoY. These metrics that Unilever was able to increase are arguable he most important metrics that affect the UL stock.
• Yearly Financial Performance (Bad): In 2020, Unilever’s Turnover decreased by 2.4%, their operating profit decreased by 4.7%, their pre-tax profit decreased by 3.5%, and their basic & diluted EPS’s fell by $0.02 since 2019. The decrease in EPS most likely had the most effect on the UL stock.

Investment Valuation:

Comparable Analyses: (Spreadsheet found at the end of this analysis)

By comparing Unilever’s financial ratios 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: (Visualization found at the end of this analysis)

The comparable analyses tell quite a different story than the DCF model will. 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: (Visual at the end of this analysis)

My dividend discount model 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 the $UL stock 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:

Catalysts:

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Originally published at https://utradea.com.