INvesting.com — Shares of Unilever Plc (LON:) fell on Monday after RBC Capital Markets downgraded the stock to “underperform,” citing concerns over 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 doubts about Unilever’s capacity to achieve its 2% volume growth target, despite its recent operational restructuring and portfolio adjustments.
RBC’s mentioned several critical factors underpinning the downgrade. The analysts noted that while Unilever’s portfolio is strong, it is not dominant when compared to peers like Nestlé.
The note flagged the company’s lack of market leadership in several categories, particularly after the divestment of its ice cream business, which had contributed to its competitive standing.
Following this divestment, Unilever will lead in only about half of its business sectors, a reduction from its prior positioning.
Volume growth remains a concern for RBC, as the company has averaged less than 1% growth annually since 2014.
The analysts questioned the feasibility of the company achieving its 2% growth aspiration, particularly given its historical struggles and the absence of clear indications that emerging markets will bridge the gap.
Despite Unilever’s strong exposure to emerging markets, RBC pointed out that currency depreciation in these regions has offset much of the volume growth historically.
The analysts also scrutinized Unilever’s capital expenditure levels, 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 insufficient.
“We think Unilever has significantly under-invested in capex over the long term and believe that a prolonged increase is needed if Unilever is to have any chance of hitting its 2% volume growth goal,” the analysts said in a note.
Adding to the concerns, RBC flagged that Unilever’s restructuring costs, which are excluded from its underlying profits, diminish earnings quality.
The company’s focus on its 30 “Power Brands” and 24 key markets was acknowledged as a sound strategy, but the report expressed apprehension about the potential neglect of the remaining 370 brands and 100 markets, which collectively account for a substantial 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, considering its already stretched valuation compared to historical averages and peers like Nestlé.
