Unilever pace leaves niggling doubts intact

Against and above

Latterly, it’s been a rare quarter indeed that Unilever has failed “against the strategic objectives set out for 2020”, and this isn’t one of them. Organic sales expectations have risen by a handful of points at a global consensus level though were still running well below the average forecast compiled by the group. Removing 1.7% currency impact leaves a 3% underlying rise in both the quarter and the half which the group’s broader investor base will almost certainly conclude is satisfactory. (Unilever’s finance chief expects top and bottom line currency impact to remain around 1%-2% for the year at current rates).  So share price drama looks unlikely today.

Margin of safety

Expect investors to equivocate more over whether Thursday’s update projects a convincing enough growth outlook for the second half. Does it warrant additional significant stock gains above the 32% seen so far this year? Shares of rival Beiersdorf, the German personal care group, are second in Europe, up just 16%, and well-matched Reckitt and Nestle have both added around 15%. Including Unilever, we reckon the sector aggregate is still slightly below 30%. Operating margin guidance has been lifted by 20 basis points to 100bp on Thursday vs. “at least” 80 basis points, though some investors will continue to note that one of the top-five global consumer product makers by revenue is still bested by Reckitt at operating margin level.

Niggles

Restiveness should be contained whilst Unilever’s rating continues to look well-behaved. Its trailing PE is slightly under Nestle and Reckitt and well below Beiersdorf. Still so far, Unilever’s goal of demonstrating it has a better plan for return on investment than the botched raid by Buffett & cos. is only half complete. Unilever’s CFO cautioned on Thursday that margin improvement in 2H will be more modest due to investment timing and marketing. Shareholders may look through that to a promised 12% dividend rise in 2017, and £5bn in buyback cash in the pipeline. There’s no question that Unilever can deliver Kraft-like value over a five-year horizon. But can it scotch niggling doubts by doing even better?

Thin volume growth

The lack of volume growth in the quarter—up just 0.3% excluding spreads—could be Unilever’s chief weak spot in current reckoning, despite the group crushing costs well ahead of plan. From next month, under UK rules, there would be scope for Kraft to return with a much more aggressive offer that overwhelms the resourcefulness of even CEO Paul Polman. Jam today could still look more compelling to most investors.