U.K.-based Unilever PLC (UL, Financial) had a difficult first half to 2020 as the coronavirus weighed on its food service and out-of-home businesses. The second half of the year was a different story as sales growth returned. The stock is down 7.5% year to date while the S&P 500 has enjoyed a nearly 6% return.
Shares are also trading below their historical valuation as well as their estimated intrinsic value. This, combined with an improving business and a solid dividend yield, make Unilever an intriguing option in the consumer staples space.
Let's look closer at Unilever to see why I feel the stock is attractively priced.
Recent earnings results
Unilever reported full-year 2020 results on Feb. 4. For the year, revenue grew 1.9%. While not terribly impressive, the company reported 0%, -0.3%, 4.4% and 3.5% sales growth for the first-, second-, third- and fourth-quarters. As you can see, the business performed much better in the second half of the year when Covid-19 restrictions weren't as severe as the first half. Earnings per share grew 0.7% to $2.88 for 2020, a decent showing given the circumstances the company faced.
Due to the pandemic-induced lockdowns, Unilever's in-home products did exceptionally well.
In Food and Refreshment, sales grew 1.2%. This segment saw incredible strength in retail foods as consumers were forced to eat more meals at home. Sales in this area were up 12%. The Knorr brand and dressings were singled out as top performers. In-home ice cream improved 17% as e-commerce sales more than doubled. On the other hand, out-of-home ice cream was one of the rare weaker spots as sales plummeted due to fewer consumers eating out.
Food Solutions also struggled, with revenue falling 30% due to decreased demand from restaurants and hospitality customers. This business did see some recovery in China, but new lockdown restrictions in many markets led to a 25% decline in the fourth quarter. It is hard to see this business stabilizing until restrictions are eased.
Beauty and Personal Care was 1.2% higher in 2020 as the company was able to expand its hand sanitizer products into more than 60 countries. Dove, which happens to be Unilever's top grossing brand, was higher by mid-single digits due to new antibacterial products.
Home Care was up 4.5% for the year due to much improved volumes. Commodity costs did rise slightly, but Unilever was able to pass these costs along to consumers in the second half of the year. Home and hygiene products grew by 17% on account of deeper market penetration and higher frequency of purchase. Unilever's bleach business grew 25% year over year as products were brought to new markets, including China. Laundry sales were only up 1%, hurt by less frequent school and work washing in India.
The company performed well in nearly every region that it operates. China improved at its usual high single-digit growth rate as this market has recovered much better than most from the pandemic. North America grew almost 8% due to gains in volumes for in-home foods and ice cream. Europe fell 1% due to commodity inflation. This is arguably a solid performance in this region given the various lockdowns that occurred. Latin America was higher by more than 4% due to price improvements.
Unilever's e-commerce business really took off in 2020. Sales for the full year through this channel were up 61% and e-commerce now represents 9% of total sales. E-commerce sales were higher in every region, with China and the U.S. leading the way. The company's e-commerce market in China grew 50% and was responsible for one-third of product turnover. U.S. digital sales were higher by 123%. Leadership noted that the company's market share in North America is below that of other regions, something that Unilever aims to improve in the coming years through its online business. The overall growth rate for e-commerce and the single-digit sales contribution shows that Unilever is likely just beginning to scratch the surface of its digital capabilities. This could be a major catalyst for growth as more products are bought online.
Another sign that Unilever's business improved as the year progressed was the company's ability to win value share. A majority of the company's businesses grew their value share, which is a measurement of the amount of money a company can make selling its products compared to what peers can make. For the year, more than 50% of the company's products grew their value share, but this figure extended to 60% in the fourth quarter.
Rounding out quarterly results, operating margins fell 100 basis points to 18.5% as the Covid-19 impact outweighed improvements in other areas, free cash flow improved 24% and the company maintained either its top or second place market position in almost every region that it has a presence.
Unilever increased its dividend 6.1% for the March 17 payment, giving the company six consecutive years of dividend growth. The quarterly dividend payment does fluctuate somewhat, but this is due to currency exchange. U.S. investors have seen their dividend grow at an annual rate of 4.1% over the last 10 years.
Analysts surveyed by Seeking Alpha expect that earnings per share will total $3.01 for 2021, a 4.5% increase from the prior year. This happens to be above the 10-year compound annual growth rate of 4.3%.
Using Thursday closing price of $55.86 and earnings estimates for 2021, Unilever trades with a forward price-earnings ratio of 18.6. Shares have an average price-earnings ratio of 22.2 since 2015 and 19.8 since 2011. Unilever is trading at a discount to its medium- and -long-term historical valuations.
Shares also appear undervalued relative to their intrinsic value.
Unilever has a GF Value estimate of $62.07 according to GuruFocus, giving the stock a price-to-GF Value of 0.90. The stock is rated as modestly undervalued. Shares would provide a 11.1% gain from current levels if they were to trade with the GF Value. In addition, Unilever yields 3.7%, meaning total returns could reach above 14%.
Final thoughts
Despite a weak performance in the first half, where the company's second-quarter sales decline was the first in nearly four years, Unilever ended 2020 on a very strong note. The company's products remain in high demand outside of those businesses that were impacted from pandemic-induced business closings. Growth was seen in nearly every region during the year. E-commerce greatly improved during 2020, but still accounts for just a high single-digit percentage of sales.
Unilever remains undervalued using either its historical earnings multiple or the intrinsic value estimated by GuruFocus. Investors buying shares of the company at the current price could see a mid-double-digit return on their investment.
The combination of company business improvement, yield and valuation make Unilever an excellent investment option. As such, I will be adding to my position when the market opens on Monday.
Disclosure: The author maintains a long position in Unilever.
Read more here:
- Eaton: Improving Business Does Not Justify the Valuation
- Emerson: Should You Buy This Dividend King?
- Domino's Pizza: Growth at a More Reasonable Valuation
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