Consumer staples companies aren’t always the most dynamic businesses to invest in. But the Unilever (LSE:ULVR) share price is rising after its latest earnings report.
The company reported 4.4% revenue growth and the report shows CEO Hein Schumacher’s restructuring plan is on track. So should investors consider buying the stock?
Sales
Unilever’s increase in sales is impressive for a couple of reasons. The first is that it demonstrates good pricing power, a sign of a long-term competitive advantage.
In the fast-moving consumer goods (FMCG) industry, switching costs are practically non-existent. This makes it difficult for businesses to increase their prices without losing customers.
Unilever however managed to raise prices by 2.2% while also increasing sales volumes by the same amount. That’s a sign the company’s brands make it difficult to disrupt.
Importantly, the strongest growth came from the company’s core brands – the ones it plans on focusing on going forward. These achieved 6.1% growth, compared to smaller 2.3% rise from ice cream sales.
A triple boost
Higher sales are encouraging for investors because they generally lead to higher profits. But there was more good news on this front from the Unilever report.
The company said the increased prices have been leading to higher margins. If that’s right, then the next update should show that profits are growing faster than sales.
Unilever also announced plans to spend around £1.28bn on share buybacks starting in Q2. That should bring down the number of outstanding shares, further boosting earnings per share.
All in all, I think this was a very good report for the company. So I’m not surprised to see the stock going up as investors take in the news.
Strategy
Unilever is doing what it set out to do at the start of the year in terms of divesting weaker units to focus on core brands. That’s a strategy that has worked well for companies such as GSK and Coca-Cola.
While I’ve been generally positive on this approach, I’ve been dubious about the firm’s ability to generate growth in its remaining brands. But the latest update’s quite encouraging on this front.
The weak results in the ice cream division are both good and bad news. On the one hand, it implies the firm’s decision to separate the unit’s a good one.
That said, the company hasn’t sold its ice cream brands yet. And its ability to get a good price for the assets depends on them looking attractive – with declining sales volumes not helping.
Time to buy?
Despite the positive news, my estimate of Unilever’s intrinsic value hasn’t really changed. I’ve been positive about the company’s plan since the start of the year and the latest update mostly confirms this.
As a result, I’m still looking to buy the stock at a price below £38. But the 5% jump in the share price today makes that just a bit more difficult for the time being.
