Unilever: new broom should sweep the dust off the stock

Incoming Unilever chief executive Hein Schumacher — most recently head of a Dutch dairy co-operative — hardly ranks as a household brand. But the ex-Unilever executive does so with activist Nelson Peltz, who with 1.5 per cent of stock has agitated for change at the consumer goods company.

Schumacher, who takes the helm in July after current boss Alan Jope retires, will inherit an underperforming company. Unilever has delivered volume and product mix growth of 1.8 per cent a year on average since 2003, compared with Nestle’s 3 per cent, according to analysis by Jefferies. That gap has widened significantly since the first quarter of 2020.

The shares have reflected Unilever’s lacklustre performance. Total shareholder return over Jope’s nearly four years to the end of 2022 has been 14 per cent, versus the sector at 40 per cent, says Bernstein.

One can see that in its valuation. Unilever trades at a significant discount to its peers. Its 17.6 times 2023 earnings compares poorly with Nestlé on 21.6 times. US home and personal care rival Procter & Gamble earns a punchier 24 times forward earnings multiple.

An easy win for Schumacher would come courtesy of more marketing spend, begun by Jope. An ill-conceived profit margin target — now ditched — led to a fall in Unilever’s brand investment as a percentage of sales since 2016.

But sluggish volumes may also be a reflection of Unilever’s sometimes underwhelming food brands. Unilever has begun tweaking its portfolio by selling its €6.8bn spreads business in 2018 and its tea unit in 2021. A rumoured $3bn sale of its US ice-cream business would also help.

Schumacher — a dyed-in-the-wool food executive, once at Heinz Foods — should know what to keep and what to cull. Ideally, he should be able to recycle capital raised from these divestments into faster growing markets and products.

At least, Unilever’s brands command loyalty. It managed to lift prices by 12.5 per cent in the third quarter with only a limited impact on volumes. The group’s emerging markets exposure — which accounts for 60 per cent of sales — could gain a tailwind given improving economic prospects and a weakening dollar.

If Schumacher delivers, and investors will expect quick action, there is potential for the group to close its valuation gap with peers.