Not everyone has heard of consumer-goods conglomerate Unilever (UL -0.12%), but nearly everyone is familiar with at least one of its brands. These include Ben & Jerry's ice cream, Old Spice deodorants, and Vaseline. Plus, the company operates all around the world.
Unilever has built a mighty empire, but its shares aren't poised to outperform the market -- at least according to AB Bernstein analyst Bruno Monteyne, who believes the stock will underperform the market, according to The Fly. Here are his three reasons.
Unilever in the near term
As a reminder, analysts can be wrong. But I believe it's helpful to read what they have to say and see if the arguments hold merit. Sometimes you can even become aware of a risk you hadn't previously considered.
Monteyne's case against Unilever has three components: 1) ongoing inflation, 2) pressure on consumers, and 3) stock market dynamics. All three points have merit right now.
The effects of ongoing inflation are clearly seen in Unilever's financial results. The company doesn't give full updates as frequently as other companies, but its gross margin fell from 43% in 2020 to 42% in 2021. And its more recent actions suggest its profit margins are still under pressure from inflation.
Through the first three quarters of 2022, Unilever's volume of products sold has dropped 1.6% from the comparable period of 2021. But the company still grew revenue because its prices have increased 10.7%. So management is increasing prices because inflation is still hurting its input costs.
Talking about the pressure this puts on consumers, CEO Alan Jope recently told CNBC that prices for its products have gone up but have yet to peak. And the drop in volume in 2022 suggests that consumers are either making do with less or buying cheaper products than Unilever's. And if the latter is true, then this trend could get worse if the company raises prices even more.
Lastly, as for Monteyne's point about stock market dynamics, many investors have flocked to stocks like Unilever during the past year looking for safety. And this has caused consumer-staple stocks to become pricey in general.
To illustrate, the price-to-earnings (P/E) ratio for the Vanguard Consumer Staples ETF is currently almost 24. By comparison, the P/E average for the S&P 500 is about 19, according to YCharts. This suggests that investors are willing to pay more for safety right now.
But that could change with improving clarity on the economy in 2023, which means investors could start selling stocks like Unilever in favor of stocks with more upside.
But what about the long term?
The arguments against Unilever stock have merit. But remember that Wall Street analysis can be more nearsighted than what long-term investors should focus on. This present period of high inflation will eventually end, consumers' household budgets will normalize, and sticker shock will fade. And market sentiment will flip and flop until the end of time.
Investors needn't ask whether Unilever stock is optimally positioned over the next year as much as whether it will outperform the market over the next five to 10 years. And I'm personally not convinced it can. Consider that Unilever is losing to the market over the past five years.
The past doesn't predict the future, but it's important to ask why Unilever has underperformed. Simply put, Unilever hasn't grown. From 2017 through 2021, the company's operating profit dropped almost 3%. Moreover, its revenue is essentially flat over this time frame as well.
UL Revenue (TTM) data by YCharts. TTM = trailing 12 months.
If the stock is underperforming the market averages because it's not growing revenue or profits fast enough, then investors should ask whether that will meaningfully change in the next five years. And again, I doubt it will.
Unilever has recently discussed shifting its strategy to focus on fewer products and pursue higher growth opportunities. But any revenue gains from this strategy will likely replace lost revenue from having fewer products in its portfolio.
Moreover, drilling down into the details of the strategy, the company's marketing expenses and spending on research and development are also predicted to tick higher in coming years, potentially holding back growth in operating profits.
In conclusion, Unilever stock might overcome the three headwinds that Monteyne is worried about these days. But that doesn't mean this stock is one to buy for the long term. Rather, I believe it has low chances of beating the market, and I would look for market-beating opportunities elsewhere.
