Food for thought – is it time to dine in on Unilever’s shares?

Unilever’s shares could be due a renaissance following higher-than-expected third quarter sales growth, but will higher costs bite into future profit margins?

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Ben & Jerry’s, Dove Soap, Hellmann’s Mayonnaise, Marmite – love it or hate it, these are just a smattering of the brands that Unilever (LSE: ULVR), an Anglo Dutch consumer goods company, owns and produces. From everyday essentials to the occasional treat, Unilever is a company that has a presence in every home in the UK and in almost 190 other countries.

Over 2.9 billion people use at least one of Unilever’s products every single day – a staggering statistic in the ever-expanding consumer product space. Does any other company (FAANG stocks aside), command this level of repeat custom? Unilever has roots that date back to 1871. It is a company that has successfully navigated its way through two world wars, multiple market crashes and a pandemic. Its worldwide loyal customer base and credibility is testament to its longevity.

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Why has the share price been falling?

Since hitting an all-time high back in September 2019, shares in Unilever have been trending downwards. During the Covid-19 pandemic, the share price was resurgent as demand for its cleaning products ranges and food brands rocketed. The euphoria did not last long and the price has been in retreat once again, with the shares currently swapping hands at £3.94, the same price as in March 2018. With sluggish sales growth prior to the pandemic and a turnaround plan taking longer to implement than previously envisaged, profits have been struggling to match shareholder expectations. Restructuring costs, expected to be around 2% of sales over the next two years, have also dismayed shareholders.

Why buy now?

In its latest quarterly results Unilever announced sales growth of 2.5% and year to date sales growth of 4.4%. Its sales from ecommerce grew by 38% and now accounts for almost 12% of overall sales. Raw material costs remain a headwind for Unilever, but the company announced it will be taking ‘appropriate pricing action’ (corporate speech for ‘our prices will be going up’). This is very important in an inflationary environment as a company like Unilever can command pricing power, as consumers see their products as essential. The impact that inflation will have on profit margins should be offset by these price rises.

Unilever also offers a compelling investment case from a valuation point of view. It currently trades at 17.6 times its earnings whereas the likes of its US peer Procter and Gamble trades at 23.7 times. Soaring valuations in the US are currently making investors uneasy, whereas UK valuations look increasingly attractive as demonstrated by the recent flurry of private equity bids.

Alongside the valuation case, Unilever delivers an inflation-busting 3.9% dividend, which has historically risen each year. This should provide me comfort in uncertain times. I believe it is therefore only a certain amount of time before the smart money begins flowing back to Unilever. If I buy the shares soon, I’m confident I’ll rewarded in the future.

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Isaac Stell has no position in any of the shares mentioned.  The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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