EUR 850.00 For Business Accounts Only

Morningstar | Sales Growth Still Sluggish, but Unilever Makes Progress on Profitability in 2018

Unilever reported sales growth for 2018 that was slightly softer than our assumptions, but a strong margin performance meant that EBIT came in above our forecast. The variance to our forecasts has no material impact on our EUR 52 fair value estimate for the Amsterdam-traded shares, although we may lower our near-term forecasts to account for the strength of the euro. Our view that Unilever is playing the hand it has been dealt quite well is unchanged. We believe Unilever offers modest upside to its current market price, although currencies and inflation in several commodities including packaging materials remain short-term challenges.

Full-year consolidated organic sales growth of 3% is a percentage point below our estimate for the midcycle growth rate. The home-care segment remains the standout, with 5.3% underlying growth in the fourth quarter and 4.2% in the full year, thanks to strong fourth-quarter pricing up 4%. We do not expect that to be sustainable, however, as we regard home care as a particularly competitive category, in which pricing is likely to be challenging in the medium term. Geographically, there was modest upside to our estimates in Europe, thanks to slightly more robust pricing than we had anticipated, down just 0.1% in 2018, and the Americas segment; the miss to our forecast was driven by currency headwinds in the Asia segment.

Unilever made some strides toward improving its EBIT margin in 2018. The full-year consolidated underlying margin of 18.4% was almost a full percentage point above that of the year before, indicating fairly strong execution on costs, given the sluggish top-line growth. Particularly impressive was the 2 percentage points of margin expansion achieved in Europe, although the margin in the Americas segment slipped 70 basis points.

Last year was not universally positive for Unilever, however. After a botched attempt to relocate the headquarters of the business to the Netherlands, CEO Paul Polman was replaced by Alan Jope at the beginning of this year. When Jope reveals his strategy, we expect a greater focus on financial metrics, which will most likely include a plan to accelerate the below-par growth rate of the business and to expand margins. We retain our near-20% estimate for Unilever's medium-term EBIT margin and think there is upside to the stock if that level of profitability can be achieved.