The Unilever (LSE: ULVR) share price crumbled yesterday after the global consumer goods giant published its first-half results. Its shares ended the day down more than 5%, although they’ve recovered some of these losses in early deals today.
It seems the market was selling the stock due to growing concerns about the company’s ability to deal with rising prices. In the first half, the group’s profit margins declined by 100 basis points, or 1%, as increasing costs ate into margins. The firm said it’s passing some of the higher costs onto consumers.
However, with prices rising faster than they have been at any point since 2011, the company still expects a margin hit for the whole year. Management is now forecasting flat profit margins for 2021, having previously forecast a slight improvement.
Still, despite these concerns, I think the ULVR share price crash was a bit of an overreaction. I believe investors spent too much time concentrating on the negatives and overlooking the positives.
As well as falling margins, one thing that stood out to me in Unilever’s results was the company’s sales figure. The group reported underlying sales growth of 5.4% in the first half, with most of that coming from the second quarter.
Each business sector saw sales growth, with the best performance coming from Beauty & Personal Care. The firm’s been investing heavily in this division over the past few years to expand into higher-margin beauty products.
What’s interesting about these numbers is that most of the company’s revenue growth came from increased sales volumes. The volume of goods shifted rose 4%, while price hikes accounted for 1.3%.
This reverses a trend that’s been in place for several years where the company has relied on price hikes to support top-line growth. Hiking prices can be an excellent strategy to raise sales quickly, but it’s not sustainable in the long run. Rising volumes suggest Unilever’s marketing efforts are working, and the group is reaching more people. I think this is incredibly encouraging.
That said, I’m well aware that runaway price inflation could ruin the party. The ULVR share price is supported by the company’s earnings. Even if sales continue to rise, higher costs could eat into the group’s profits. And falling profits could drag the stock lower. This is the most considerable risk the firm faces right now, and it’s something I’ll be keeping a close eye on going forward.
ULVR share price opportunity
I think the recent share price slump presents an opportunity. Unilever is a world-leading company, which has over 2.5bn customers. Its brands are well-known globally and, as its first-half figures show, consumers are buying more.
As well as the group’s competitive advantages and growth potential, the stock also offers a dividend yield of 3.5%. As such, based on all of the above, I’d be happily buy more of the stock for my portfolio today.
Rupert Hargreaves owns shares of Unilever. 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.