Unpacking the Surge in Unilever Stock

Unilever stock (NYSE: UL) surged by 32% since early January 2022, catapulting from $49 to $64, outpacing the S&P 500 which rose by 18% during the same period. Basking in the glow of a 12% uptick in its P/E ratio, climbing from 22x in 2021 to 24.5x presently, Unilever’s net income soared by 15% from $5.8 billion to $6.6 billion. This marked improvement stemmed from increased sales and margin growth, a feat that earned the company accolades from investors. For those seeking a deeper dive, our thorough analysis in the article ‘Why Unilever Stock Moved’ sheds light on the ascent.

Unilever witnessed lackluster performance in the preceding three years, with returns plunging by -8% in 2021, -3% in 2022, and remaining flat in 2023. Conversely, 2024 showed promising results with a remarkable Year-To-Date (YTD) gain of 36%. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, offers a calmer ride and has consistently outshone the S&P 500 each year. What magic potion does this diversified portfolio possess? It seems to provide better returns with lower risks compared to the benchmark index, evident from HQ Portfolio’s impressive performance metrics.

Amidst the fog of uncertain macroeconomic conditions involving rate cuts and tepid consumer sentiment, could Unilever face a déjà vu of the underperformance witnessed in 2021 and 2023, or is a skyrocketing leap on the horizon? Our valuation of Unilever at $62 per share closely shadows its market price of $64, calculated based on a forward expected earnings estimate of $2.90 per share in 2024, at a 21x multiple, slightly above the stock’s historical P/E ratio of 19x over the last five years.

Unilever’s revenue channels are bifurcated into three segments – Personal Care, Foods & Refreshments, and Home Care, each contributing 44%, 35%, and 21% respectively towards the company’s total sales in 2023. Dig deep into Unilever’s revenue sources through our detailed analysis, ‘Unilever Revenues: How Does Unilever Make Money.’ The recent sales surge in the company can be credited to a harmonious blend of improved pricing strategies and volume upticks. Notably, Unilever’s sales stood at $33.6 billion in the first half of 2024, propelled by a 4.1% surge in underlying revenue, backed by a 2.6% volume rise and 1.6% hike in pricing. The future trajectory looks promising, with a projected underlying sales growth of 3% to 5% in the near term. Over a slightly prolonged timeframe, Unilever has witnessed sales swell by 7% from $59.8 billion in 2021 to $63.9 billion in 2023, primarily attributed to enhanced price realization.

Embracing the upward trajectory in sales, Unilever’s adjusted net margin snowballed from 9.7% in 2021 to 10.4% in 2023. The initial half of 2024 saw the company’s underlying segment profit margin skyrocketing by 250 basis points year-on-year due to vigorous cost management and increased volumes. Favorable dwindling interest rates augur well for consumer sentiment, setting the stage for Unilever’s future performance.

Unilever appears poised to deliver a modest single-digit average annual top-line growth alongside a mid to high-single-digit spike in earnings over the forthcoming three years. Investors have bestowed the stock with a richer valuation multiple, yet, is it ripe for the picking at the moment? Not quite. While the appeal of enhanced profitability and escalating volumes has charmed investors, the current valuation seems to have baked in these positives. Hence, investors eyeing Unilever might find it judicious to bide their time for a dip in the stock price before delving in.

If one is contemplating Unilever’s valuation, juxtaposing it with companies spanning diverse sectors through industry-wide comparisons at ‘Peer Comparisons’ can offer valuable insights.

[1] Returns as of 9/19/2024
[2] Cumulative total returns since the end of 2016

For those seeking investment opportunities, delving into ‘Market-Beating Portfolios’ by Trefis could provide fruitful avenues.