Rising Commodity Costs And Geopolitical Risks Will Undermine Stability

Key Takeaways

• Rising competition from private labels and value brands, along with shifting consumer preferences, threatens Unilever's market share and revenue growth prospects.
  
• Ongoing cost pressures from regulatory demands, supply chain disruptions, and commodity inflation are likely to reduce profitability and heighten earnings volatility.
  
• Strategic portfolio optimization, brand investment, and focus on premiumization are driving sustainable volume growth, margin improvement, and market leadership across developed and emerging markets.

Catalysts

Operates as a fast-moving consumer goods company in the Asia Pacific, Africa, the Americas, and Europe.

• The accelerating shift toward private label and value brands, driven by rising global price sensitivity, threatens to erode Unilever's market share and weaken its ability to sustain price increases, placing long-term downward pressure on revenue growth.
  
• Heightened geopolitical risks, protectionism, and unpredictable supply chain disruptions, especially in emerging markets, are likely to increase operational costs and complexity, undermining gross margin stability and leading to greater earnings volatility.
  
• Intensifying regulatory scrutiny and consumer demands around environmental and social impact will force Unilever to shoulder higher compliance costs and risk reputational setbacks, increasing SG&A expenses and potentially compressing net margins over time.
  
• Persistent underperformance in key growth markets such as China and Indonesia amid rapidly shifting consumer preferences and channel fragmentation signals that Unilever may continue to lose relevance to more agile competitors and local direct-to-consumer brands, compromising future topline growth and margin expansion.
  
• Ongoing inflation in key commodity inputs like palm oil and packaging, combined with currency volatility in emerging markets, will limit Unilever's ability to protect profitability through further price hikes, resulting in sustained gross margin compression and a drag on operating profit growth.

Unilever Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Unilever compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Unilever's revenue will decrease by 3.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.5% today to 13.9% in 3 years time.
• The bearish analysts expect earnings to reach €7.7 billion (and earnings per share of €2.88) by about July 2028, up from €5.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, down from 22.3x today. This future PE is lower than the current PE for the US Personal Products industry at 19.6x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.25%, as per the Simply Wall St company report.

Unilever Future Earnings Per Share Growth

Risks

• Unilever's execution of its Growth Action Plan (GAP) has restored gross margins above pre-pandemic levels and accelerated innovation behind Power Brands, which supports sustainable volume-led revenue growth and underpins improved net margins.
  
• Strategic focus on premiumization, evidenced by strong Beauty & Wellbeing performance and targeted acquisitions in higher-growth, premium segments, enhances pricing power and long-term net margin expansion.
  
• Structured portfolio optimization and divestiture of slower-growing or lower-margin businesses, alongside investment in digital and direct-to-consumer channels, are streamlining operations and improving earnings quality for the group.
  
• Ongoing allocation of higher capital to brand investment and productivity initiatives has driven increased brand equity, cost efficiencies, and a more agile organization, setting the stage for higher operating profit and consistent earnings per share growth.
  
• Strong market share trends in key developed markets, coupled with decisive interventions in high-potential emerging regions like India and China, support broad-based revenue growth and position Unilever to benefit from long-term secular trends such as the rising global middle class and growing consumer demand for health, wellness, and sustainable products.

Valuation

• The assumed bearish price target for Unilever is £38.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Unilever's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £59.48, and the most bearish reporting a price target of just £38.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €55.3 billion, earnings will come to €7.7 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 8.2%.
• Given the current share price of £44.45, the bearish analyst price target of £38.0 is 17.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.