Unilever Company Project Analysis

Company project analysis: Using the analytical tools each of you will learn, each person will prepare an analysis of a public company. The company will be evaluated from the perspective of both fixed income securities (e.g., would you buy the bonds in the medium to long-term?) and equity securities (e.g., would you buy or sell the stock in the medium to long-term?). You can provide some graphs and partial financial statements to help explanation.
I attached a file in Additional materials. That file is what I learned in this course, and writer can include some topics in the essay.

Approaches to the analysis should include:
(1) Current state of the financial health of the company
(2) Trends in the financial health over recent years and potentially into the future
(3) Comparison of the subject company with competitors and/or industry sector
(4) Analysis of the subject company’s industry sector
-Relative strengths or weaknesses
-Factors affecting the industry such as product, technical
innovation, regulation, economic cycles, etc.
(5) Assessing the company’s position within the industry context
-Is it a leader?
-Does it have a clear advantage vis a vis other industry
participants?
Is it subject to extreme competition or pricing pressure?

ANSWER

Unilever Company Analysis

Introduction

This analysis focuses on Unilever’s financial health and standing in the global fast-moving consumer goods (FMCG) industry. The company is a European multinational operating out of London, England, after scrapping a second headquarters in Rotterdam, Holland, as a result of the Brexit referendum, which has resulted in Britain leaving the European Union (Dentoni & Veldhuizen, 2012). The company manufactures a diverse range of products, including beauty products, cleaning agents, food and snacks, healthcare products, non-alcoholic beverages, personal care products, and pregnancy tests. These product categories cover more than 400 brand names that generated a turnover of €52 billion and a net income of €5.3 billion, according to its last annual report (Unilever, 2020). This vast array of products falls under the company’s three divisions: food and refreshments, Homecare and Beauty and personal care. The company, which commenced operations in 1929, is today listed in numerous countries. Thanks to many subsidiaries, it registers in target markets for supplies of its products, acquiring promising local companies and local stability. However, its primary listing is in the London Stock Exchange, where it is one of the market maker stocks that analysts follow.

Unilever’s financial fundamentals vs. competitors

Unilever witnessed a drop in revenues and profits between 2018 and 2019, attributed to numerous factors. The main cause of the decline was the Food and refreshments division that saw a plunge in revenues from €25 billion to €21 billion over the period due to reduced sales of frozen and non-essential foods such as frozen pizza (Team, 2020). This trend is expected to worsen over 2020 as the coronavirus pandemic takes its toll. As people stay away from restaurants and spend more time at home, non-essential foods will continue to suffer sales. However, other divisions such as Homecare and Personal care divisions are expected to contribute to revenue support or even improvement because the company is the leading supplier of products such as hand sanitizers in great demand worldwide. This report juxtaposes the company’s performance with competitors Proctor and Gamble and Nestle. P&G specializes in various personal care and hygiene, and consumer and personal health products. Just like Unilever, the products are organized in different segments. P&G segments often include Grooming, Healthcare, Home and Fabric care, family care, and baby care, to mention a few. They have various products in common, which make it Unilever’s main competitor.  As mentioned above, Unilever had a turnover of €52 billion and incomes of €5.3 billion in terms of revenues and net profit. P&G, on its part, had revenues of €55.6 billion and a net income of €3.2 billion, while Nestle came out on top of the pile with revenues of €78.77 and a net income of €10.6 billion (Procter and Gamble, 2020; Nestle, 2020).

Unilever’s P/E ratio stood at 14 at the end of 2019, which suggests its stock price in the London Stock Exchange was 14 time its income on each share. Proctor and Gamble, on the other hand, had a P/E ratio of 69 and Nestle with a ratio of 35. From this, it is possible to conclude that Unilever is the least value of these three stocks in investor trade rather than the stock price. There is high investor interest in P&G and Nestle compared to Unilever. It also suggests Unilever delivers higher value in dividend terms per share traded in the markets than its competitors. As a result, it becomes an attractive buy for conservative investors not interested in the volatility that accompanies speculative markets with frequent and unpredictable fluctuations.

Unilever’s P/B ratio stood at ten by the end of 2019, which suggests that it is overvalued because this ratio compares the share price to the company’s real book value. Conservative investors frequently look for a value of 3 or less, with the lower ratios suggesting an undervalued share and vice versa. P&G, on the other hand, P&G had a P/B ratio of 7 at the end of 2019, suggesting its share price values were closer to its book value than Unilever. Nestle had a P/B ratio of 6 for the focus period, which reveals an even better value judgment for the competitor than Unilever. The fact that all these players in the FMCG sector were witnessing their shares traded above normal or stable levels is attributable to the fact that by late December 2019, there were already signs of major economic disruption due to the Covid-19 pandemic. China was already in lockdown, where many global FMCG develop or sell their products. Hence investors may have been anticipating a surge in sales of FMCG products through 2020, which would translate into bounty earnings for the companies’ shareholders.

The Debt to Equity Ratio is another metric that expresses how well run a company is compared to competitors in the industry and fellow listed companies. Unilever had a D/E ratio of 1.962 as of December 2019, while P&G stood at 0.618 and Nestle at 0.714. From this, we can conclude that Unilever’s debts stood at 196% of its equity while P&G’s was at 61.8% and Nestle at 71.4%. Financial analysts rely on a benchmark of 100%, which means the company’s debts are not more than its equity. However, for Unilever, this abnormally high amount suggests that either one of two things happened. First, the company could have recently made new investments, such as setting up a new manufacturing base that it expects to reap in the future. Second, the company could have made imprudent investments in the past that left it with a huge debt that it cannot liquidate as fast as it would want to, so they linger in the balance sheet.

The current ratio compares the assets that a company holds, which it can dispose of within one year, against its liabilities that can be liquidated within 12 months. Unilever has a ratio of 78%, while P&G stands at 63%, and Nestle has 86%. It means that Unilever only has current assets covering 78% of its current liabilities, which suggests it has short-term liquidity challenges. Nestle, which is the biggest of the three, is best placed to handle current debts, while P&G’s situation is worse than the other two.

The Return on Equity ratio enables financial analysts to compare a company’s net income to its shareholder equity. As a result, it demonstrates how well run the company is in terms of the management, doing a thorough job of deploying every bit of resources at their disposal. Unilever had an RoE of 46% by the end of 2019, which is quite good, considering most companies are comfortable operating anywhere above 10%. American P&G had an RoE of 28% for that period, while rival Nestle had an RoE of 29%. These results suggest that in the run-up to 2020, these leading FMCG companies were all being run exceptionally well with resources being deployed prudently and effectively. However, Unilever had the edge over its competitors, which would be an attractive prospect for long-term investors willing to invest in the company’s future.

In conclusion, Unilever is in the unenviable position of heavy debt burden amidst a pandemic whose duration is uncertain. Amidst this uncertainty, the only attractive ratio it displays is a P/E ratio of 14 within the market range. On the other hand, Nestle has an impressive ratio all across the board and shows a much more robust performance except for the P/E ratio, which possibly only means that investors are over speculating with the stock. Hence an investor considering these three companies should take a closer look at the firm as a possible investment choice.

Strengths of the FMCG industry

The FMCG has some unique strength that have increased its resilience over the last 100 years. These strengths have easily translated into a relatively stable global industry where millions of players of all sizes can compete on an almost equal footing (Bala & Kumar, 2011). First, the FMCG industry has one of the highest turnovers globally, worth more than €10 trillion spread across all countries in the world. This vastness means that there is always room for growth and development for the serious player’s keen on providing popular goods to customers and reaping big profits. This deep revenue base and profit-taking opportunity mean that any investor interested in earning decent returns and willing to apply innovation and slick marketing is highly likely to build a niche in a short period and possibly build a lasting business. With their astonishing combined income exceeding €150 billion, the three companies mentioned above show the potential the industry holds for entrepreneurs.

Second, the FMCG industry provides necessities that customers must use. The necessity of its products ensures that there is always a target market desiring the industry’s products, which is a guaranteed source of income. Some of the products, such as food, personal care, and home care solutions, have an unstoppable demand that never wanes regardless of the season, time of year, economic considerations, or even political stability. Hence, the sector’s players make for reliable investment targets that will always guarantee shareholders continuing profits and returns.

Third, the sector provides considerable leverage and risk mitigation opportunities. FMCG manufacturers can produce numerous complementary products and sell them as bundles units much easier than other industry players. For example, skincare producers often produce shower gel, lotions, and moisturizers that go together and are cheaper bought in a bundle than separately. This bundling arrangement ensures that producers can make multiple times more revenue than they should initially get, a strategy that also means their risk profile is spread out into many different products simultaneously. Furthermore, producers can offer products at very low prices, even in developing and emerging markets, without appearing too expensive or exploitative to the local populace.

Fourth, the FMCG industry, as its name suggests, consists of fast moving goods, most of which are not perishable. It means that the lead time from production to actual sale at the retail level is quite short, and the producer is paid back much faster than other sectors. This turnaround time factor safeguards companies in the industry because not only are their goods useful for protracted periods, and they are also easily disposed to the consumer without the headache of long lead times. Consequently, a producer with prudent financial management methods can conduct their business with minimal risk and loss.

Factors affecting the FMCG industry

The FMCG sector suffers from product proliferation such that customers end up having little discriminative perceptions due to the ubiquity of similar output. Therefore, the industry tries to counter this indifference that creeps into customer decisions through aggressive marketing, which in turn also becomes too ubiquitous, further hardening consumer disinterest. The consequence is that FMCG companies are the highest spenders on marketing as they try to differentiate themselves from competitors who place them under pressure through similar branding and other competitive strategies.

Second, the FMCG sector is one of the most competitive in the world in terms of strategy. Competitors have numerous approaches that can easily wipe away a dominant rival’s advantage in very little time, reducing a once-dominant brand into a fringe player. This competitiveness makes it incredibly difficult for players at all levels to maintain their place in the sector or even improve and surpass rivals.

Finally, FMCG products are often the first targets of new taxation from governments worldwide due to the ease they provide in passing the cost off to consumers. Value-Added Taxes often hit FMCG products hardest with ranges from as low as 1% to as high as 25% around the world in addition to duties of anywhere from 1% to 50%. The company can make a simple product quite expensive and unattractive to consumers, especially if it is not produced locally.

Unilever’s position within the FMCG industry

In terms of industry ranking, Unilever is the fifth biggest FMCG Company in the world based on its revenues and profits for the year 2019. Others ahead of the company include Nestle (the biggest), Johnson & Johnson, Pepsi, and P&G in that order. They all have a global presence across the globe and focus areas that do not always coined but sometimes put them in competition.

However, Unilever has the advantage of the widest distribution in terms of presence overseas. The company has substantive subsidiaries in 190 countries around the world, much more than all these rivals. Consequently, it has a very deep brand recognition, which has ensured many customers worldwide buy its products without a second thought. A factor that is ensuring it retains its position among the top players. On the one hand, the company as a brand is synonymous with consumer goods affordability, quality, and availability. On the other hand, the company’s brands, which number more than 400 each, have their niches across the world, ensuring the company keeps the revenue coming through multiple products.

However, Unilever must contend with extreme price pressures from competitors all across the board. One of the industry’s strengths is its ability to offer very low prices to consumers who then become lifelong customers. However, this strength is also a weakness because it can reduce its ability to secure profits in a competitive environment.

References

Bala, M., & Kumar, D. (2011). Supply chain performance attributes for the fast moving consumer goods industry. Journal of transport and supply chain management, 5(1), 23-38.

Dentoni, D., & Veldhuizen, M. (2012). Building capabilities for multi-stakeholder interactions at global and local levels: the case of Unilever. International Food and Agribusiness Management Review, 15(1030-2016-82857), 95-106.

Nestle. (2020). Annual Report 2019.

Procter and Gamble. (2020). Annual Report 2019.

Team, T. (2020, May 08). Unilever Revenues Dipped from 2017-2019, Drop Again in 2020? Retrieved December 17, 2020, from https://www.forbes.com/sites/greatspeculations/2020/05/08/unilever-revenues-dipped-from-2017-2019-drop-again-in-2020/

Unilever, P. L. C. (2020). Annual Report 2019.

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