The Unilever (LSE:ULVR) share price hasn’t done well this year. The stock is down from around 4,800p in November of last year to around 3,900p currently. Although there are many reasons for the decline, here are some key reasons why I think the ULVR share price fell and what I’d do as a result.
Why I think the ULVR share price weakened recently
I reckon the ULVR share price has fallen for two reasons. First, I think stock rotation could have something to do with Unilever’s decline. Given its defensive position, many larger institutional investors may have gone into Unilever as a ‘safe haven’ during the first part of the pandemic, when things were very uncertain. Given that it’s a leading consumer staple whose main products don’t cost very much, many investors likely reasoned that the pandemic wouldn’t greatly affect Unilever’s demand.
With the better-than-expected initial Covid-19 vaccine news which brought more certainty, however, some institutions may have rotated out of Unilever and into more cyclical stocks. Indeed, ULVR shares began declining in November of last year. That is right around the time that Pfizer announced that its vaccine candidate was around 95% effective (against the initial Covid-19 strain).
Second, I reckon Unilever’s annual result report released early February may have missed the market’s estimates. For the 2020 year, annual sales fell 2.4% to €50.7bn and operating profit fell 4.6% to €8.3bn. As my colleague Roland Head pointed out, one particular item of note was that the company was only able to raise average selling prices by 0.3%. The rather soft increase in average selling prices could indicate increased competitiveness for Unilever’s products.
What I’d do
In terms of the ULVR share price, the sector rotation isn’t a big issue to me. Eventually all the institutions that want to rotate out will leave. As a result, that downward pressure on the stock due to the rotation will wane. At some point, the market will judge Unilever on its fundamentals. To me, Unilever’s fundamentals are attractive in the long term given the company’s exposure to emerging markets.
I’m not concerned about the earnings report either. On a long enough time horizon, companies will have good earnings reports and bad earnings reports. Just because Unilever’s earnings report failed to meet some expectations doesn’t mean its long-term prospects have worsened.
In terms of those long-term prospects, I think Unilever is still attractive given its marketing savvy and scale. I also like its large emerging markets operations. Although Unilever will likely continue to face tough competition that’s in many instances cheaper, the company has had a long history of growing regardless, and I reckon management will make the right moves to continue growing sales and profit in the long run. With the ULVR share price now lower than before, I’d still buy.
With this said, I don’t know when the stock will bounce back because I don’t know when the rotation will end or when the company’s results will beat estimates. It could be a while. If management makes a bad M&A deal or if the company doesn’t do as well as expected against competition, the ULVR share price could underperform in the long term as well.
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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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