Analyst Note| Philip Gorham, CFA, FRM |
Unilever reported first-half results that were in line with our forecasts on the top line but missed our forecasts on profitability. With commodity costs still on the rise, management has lowered its guidance on input costs for the year and we have modestly lowered our near-term margin assumptions. The market has reacted negatively to the report, and we believe investors will rightly be concerned about the ability of Unilever to pass through inflation to consumers, given its fairly commoditized and competitive categories. Nevertheless, we still believe a 20% EBIT margin is achievable by 2023, and the short-term margin pressure has no impact on our EUR 50 fair value estimate. There is modest upside to our valuation, but it is difficult to see a swing in sentiment until inflation subsides or it becomes clear that the consumer is willing to absorb some of that cost pressure.