Why I Hate Unilever plc

There is good and bad in every stock. But does the bad now outweigh the good at Unilever (LSE: ULVR) (NYSE: UL.US)? Here are five reasons why it might.

It’s not all it’s cracked up to be

Everybody loves Unilever. It’s a core holding in many a portfolio. But in share price terms, however, it’s a plodder. The stock has eased up 65% in five years, but that only mirrors growth on the wider FTSE 100 in that time. And it is down 12% in the past six months, as investor confidence begins to ebb. This might be a buying opportunity if you believe in the long-term Unilever story, but there are solid reasons for the slide.

It is failing to develop

Organic growth in developed markets remains disappointingly flat, and management seems to have little appetite to speed things up through acquisitions. Unilever’s recent Q3 results showed 0.3% negative growth in developed markets, with the board seeing little sign of improvement. US performance has been particularly poor. Unilever trades in a highly competitive market, forcing it to pour huge sums into marketing. There are no easy gains to be made here.

There’s another emerging problem

Unilever has been doing better in emerging markets, inevitably, posting 5.9% growth in Q3. But that still marks a slowdown from 10.3% in the first half of the year, due to macro-economic problems and currency volatility. I thought Unilever was a great way to play the emerging market consumer, but sales have been slowing in Asia and Africa, while reinvigorated competition has forced Unilever to hold prices down to keep its brands competitive.

Currency is proving a drag

Unilever’s Q3 turnover fell 6.5% to €12.5 billion, which included a negative currency impact of 8.5%. I usually assume currency swings will balance out over time, but analyst Panmure Gordon disagrees. It recently warned that earnings per share (EPS) growth this year and next will also be held back by the currency drag, and downgraded Unilever from a ‘buy’ to a ‘hold’, lowering its target price on 2,800p to 2,625p. Today, it trades at2472p, just 6% below that target. Panmure isn’t the only sceptic, Credit Suisse recently downgraded Unilever from merely ‘neutral’ to ‘underperform’.

I can’t decide if this is an opportunity or a threat

Trading at 15.4 times earnings, Unilever is a lot cheaper than it’s been for some time. One year ago, it was trading at 18 times earnings. That’s hardly surprising, given a dismal 18% EPS drop in 2013. It should see a modest recovery next year, with EPS forecast to rise 5%. That’s something, I suppose. As is the meatier 3.9% yield, up from 3.3% one year ago. If you’re a believer, you might want to take advantage of this slippage. But I’m struggling to feel the love right now.

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> Harvey doesn't own shares in any company mentioned in this article.