Despite a noticeable rebound in Unilever PLC (LSE:ULVR)’s gross margins and an operating margin boost in the first half of 2024, investment bank Jefferies remains sceptical about the sustainability of these improvements.
Analysts raised concerns about Unilever’s future sales growth and free cash flow in a Tuesday broker note.
While the recent margin beat and guidance raise has ramped up profitability expectations, “the stock requires improving trends/indications on sales growth and FCF/returns”, but these “look less reliable”, said analysts.
Jefferies also pointed out that the apparent disconnect between profit growth and FCF generation might lead to further disappointments in the near term, potentially triggering a derating of Unilever’s stock.
Second-quarter sales growth “missed expectations as strategic pricing has been used to boost volume/market share momentum”, yet volumes were hindered by the “persistent boycott of Western brands in some markets and the slowdown in US demand, notably of Prestige Beauty & Wellness”.
“These trends threaten (second-half) sales growth relative to expectations, we think,” analysts added.
Jefferies, therefore, expects 13% downside on Unilever stock, leading to an ‘underperform’ rating on the current 4,730p share price.