Unilever shares rose a little yesterday (and are up a little more today) on the back of results that showed underlying sales growth of 2.5% in the third quarter. One of the central themes of its update was inflationary pressures.
Finance chief Graeme Pitkethly predicted there would be little let-up in such pressures. On a call yesterday he said: “We expect inflation could be higher next year than this year“, adding that it was likely to peak in the first half of 2022 and to moderate thereafter.
The good and the bad
Overall, Unilever was able to raise prices. This is, in my opinion, vital if inflation is to persist as the FMCG company predicts. Unilever is doing well in its key markets with good growth in the last quarter in the US, China and India. Emerging markets are important to Unilever’s overall ability to grow so this is a really positive update.
E-commerce is also growing quickly. It grew 38% over last year and now makes up 12% of sales. That means there’s still plenty of runway left to keep growing online sales. The added benefit of going direct to consumer is it tends to be more profitable than selling through other channels.
All three divisions of Unilever saw modest sales growth, so if that trend continues it should help the shares.
Yet investors don’t seem to like Unilever shares much. Over 12 months the share price is down 18%. Fears over sluggish growth remain and Unilever hasn’t disposed of its tea business yet either. The shares aren’t particularly cheap given the low growth it’s achieving.
Also, if prices do rise there’s the ‘Lidl effect’ to take into account. Will consumers go for much cheaper own-brand products – especially in the home care division – if prices rise? Are consumers particularly loyal to a brand of bleach or dishwasher tablets? Possibly not.
The price rises Unilever achieved this quarter may not be sustainable. And any hint of reduced margins could well hit the share price hard.
Is it worth buying?
Graham Smith at Fidelity said: “The Unilever share price doesn’t look cheap, trading on about 22 times earnings (16 times for the MSCI UK Consumer Staples Index), but the shares do have an attractive historic yield of 3.9%. Cost pressures are likely to continue to weigh in the short term, but longer-term growth, especially in emerging markets, remains a good reason to keep the faith.”
As noted, emerging market growth is very important for Unilever. I also think it’s worth bearing in mind that FMCG companies are popular with investors like Nick Train who holds the company and has a great long-term investing record. Unilever is the third-biggest holding in the Lindsell Train Global Equity Fund.
My belief is that these results show Unilever could be a top stock for my portfolio if inflation persists. But that does need to be balanced against sluggish growth and the threat that Unilever may struggle to raise prices. I’ll keep an eye on the shares, but won’t rush to add them to my basket.
