Unilever shares have a lot of potential, says Fundsmith’s Terry Smith

Unilever shares have produced disappointing returns in recent years. However, Fundsmith Equity portfolio manager Terry Smith remains bullish on them.

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Image source: Unilever plc

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Unilever (LSE: ULVR) shares haven’t performed very well. Over the last five years, they’ve fallen about 10%

One investor who’s bullish on the shares however, is Fundsmith Equity portfolio manager Terry Smith. He reckons that, after their recent dip, they have a lot of potential.

‘Quite a lot going for it’

At Fundsmith’s annual meeting in February, Smith and his sidekick Julian Robins (Fundsmith’s Head of Research) were asked which stock in their portfolio has the most potential right now.

Their answer was Unilever. Smith and Robins explained that after years of suboptimal management, Unilever is an unloved business.

However, they said that, with a new management team in place, led by Hein Schumacher, the consumer goods stock has “quite a lot going for it”.

They also noted that the new management team has laid out plans to turn Unilever into a leaner, more efficient company.

And they think this is the right strategy for the company, which in recent years has destroyed a lot of shareholder value by making poor acquisitions (eg Dollar Shave Club for $1bn).

Unlocking Unilever’s full potential

Now I have to admit I was a little bit surprised by this answer. Given that Fundsmith owns some really exciting technology stocks, such as Microsoft, Apple, and Alphabet, I wasn’t expecting Unilever to be the company they’re most bullish on.

But I can see their logic. In recent years, Unilever’s lost its way a bit. This is reflected in its share price.

But the new management team aims to turn things around. The goal is to unlock Unilever’s full potential by increasing investment behind its 30 ‘Power Brands’, offloading non-core brands, and driving a sharper performance focus with clear targets across the whole organisation.

Ultimately, management wants to do “fewer things better, with greater impact”.

There is much to do but we are moving with speed and urgency to transform Unilever into a consistently higher performing business

Unilever CEO Hein Schumacher

As for the valuation, there’s room for a re-rating if management can execute on its plan. Currently, the forward-looking price-to-earnings (P/E) ratio using next year’s earnings forecast is just 15.9.

If the company was able to show it’s firing on all cylinders, I wouldn’t be surprised to see the multiple rise up to around 20, or higher, where it was a few years ago.

I’m holding

Of course, the new leadership team is going to have its work cut out to turn things around.

In the current environment – where money’s tight for a lot of people – many consumers are trading down to cheaper consumer goods brands. This could put pressure on sales growth in the near term.

But I’m optimistic about the potential here though. So I’ll be holding on to my Unilever shares for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has positions in Alphabet, Apple, Microsoft, Unilever Plc, and Fundsmith Equity. The Motley Fool UK has recommended Alphabet, Apple, Microsoft, and Unilever Plc. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. 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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