Unilever shares fall as RBC downgrades stock to ‘underperform’ on growth concerns By Investing.com
INvesting.com — Stocks Unilever Plc ( LON: ) fell on Monday after RBC Capital Markets downgraded the stock to “weak”, citing concerns about the company’s ability to sustain recent growth and meet its ambitious targets.
The downgrade follows a stellar 2024 for Unilever shares, which outperformed the MSCI European Consumer Staples Index by 32%.
RBC analysts James Edwardes Jones and Wassachon Udomsilpa expressed doubt about Unilever’s ability to hit its 2% volume growth target, despite recent operational restructuring and portfolio adjustments.
RBC cited several critical factors supporting the downgrade. Analysts noted that while Unilever’s portfolio is strong, it is not dominant compared to rivals such as Nestlé.
The note highlighted the company’s lack of market leadership in several categories, particularly after divesting ice cream sales, which contributed to its competitive position.
After this sale, Unilever will lead in only about half of its business sectors, a reduction from its previous positioning.
Volume growth remains a concern for RBC, as the company has averaged less than 1% annual growth since 2014.
Analysts have questioned the feasibility of the company achieving its 2% growth target, especially given its historical problems and the lack of clear signs that emerging markets will bridge the gap.
Despite Unilever’s strong exposure to emerging markets, RBC noted that currency depreciation in these regions has historically offset much of the volume growth.
Analysts have also scrutinized Unilever’s levels of capital expenditure, which they believe are significantly lower than competitors.
They noted that while Unilever has benefited from a benign gross margin environment in recent quarters, the company’s investment in long-term growth appears to be lacking.
“We believe that Unilever has significantly underinvested in capex over the long term and believe that a prolonged increase is necessary if Unilever is to have any chance of achieving its 2% volume growth target,” the analysts said in a note.
Adding to concerns, RBC flagged that Unilever’s restructuring costs, which are excluded from underlying earnings, are weighing down earnings quality.
The company’s focus on its 30 “power brands” and 24 core markets was recognized as a sound strategy, but the report raised concerns about possible neglect of the remaining 370 brands and 100 markets, which together make up a significant portion of the business.
The downgrade comes alongside a reduction in RBC’s price target for Unilever to GBp 4,000 from GBp 4,800.
At this valuation, RBC sees limited upside for the stock, given its already stretched valuation compared to historical averages and peers like Nestlé.
