What to do with Unilever after Q3 miss

A big miss to analyst expectations in the third quarter due to adverse weather conditions in Europe and hurricanes in the US took 4% off Unilever's highly rated shares Thursday. The food and consumer goods conglomerate had rallied almost 7% into these numbers, hitting a record high yesterday, but are the good times coming to an end?

Short answer is probably no. Third-quarter organic sales growth of 2.6% may have been 130 basis points below consensus forecasts of 3.9%, but analysts at UBS think the results are "better than it might appear at first glance".

While Unilever saw sales in Europe and North America decline by 1.6% and 2.9% respectively, there were obvious excuses. Bad weather affected sales of its Magnum and Ben & Jerry's ice creams in Europe, while hurricanes in Florida and Texas held back the Americas.

The Anglo-Dutch blue-chip was aided by strong underlying sales growth in emerging markets of 6.3% and an improvement in volumes across much of the business.

Away from the numbers, Unilever's "on track" to deliver its 2020 targets of €6 billion (£5.4 billion) in cost savings and 20% underlying operating profit margin. It was 17.8% in the first half. Plans for integrating its foods and refreshments divisions into a single business are "advancing well" and preparations for a sale or demerger of its spreads business is "fully on track".

Unilever's €5 billion share buyback programme should complete by the end of the year, with €3.9 billion of stock purchased so far. Acquisitions in the last three months include Weis ice cream in Australia, PukkaHerbs tea in the UK, Carver skin care in Korea, and MãeTerra organic food in Brazil.

Chief executive Paul Polman reiterated full-year guidance of 3-5% growth in group underlying annual sales and improvements in profit margins. "While conditions in our developed markets remain challenging, we are starting to see signs of improvement in some of our biggest emerging markets including India and China," he said.

No material changes to consensus organic sales forecasts of 4.5% and 4.1% for FY17 and FY18 respectively are expected, UBS tells us, though month-to-month foreign exchange movements could trim earnings per share (EPS) forecasts.

"Nevertheless, the stock is likely to come under pressure in early trading," explains analyst Pinar Ergun. That can be blamed on the rather expensive-looking forward earnings multiple of 21 times, which Ergun describes as "fair" and is in-line with EU staples. He reduced his price target by 50p to £44 a fortnight ago.

"The potential upside from the strategic review appears to be largely reflected by consensus expectations... However, the legal review presents upside risk to the share price," he explains.

Clearly, Unilever is an excellent business with consistently high return on capital and barriers to entry as well as strong pricing power. A staple in the portfolios of many high-profile fund managers, the shares are mostly rated a 'hold'.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.