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Sell Unilever as growth is “unsustainable”, says UBS, buy Reckitt Benckiser instead

Six of Europe's Big 7 fast-moving consumer goods companies are battling to adapt their business models to a fast-changing and challenging environment

Reckitt Benckiser

Unilever PLC (LON:ULVR) shares had a ‘sell’ label slapped on them by UBS on Monday, while rival Reckitt Benckiser Group PLC (LON:RB.) was upgraded to ‘buy’ for its turnaround potential.

“Stock picking has never been so critical,” analysts at the Swiss investment bank said in a series of notes to clients on Monday, given the growing operational dispersion between the big seven European food and home & personal care companies. 

Six of the seven are currently going through a transition phase as the sector become “increasingly complex with most large caps urging the market to disregard their current earnings growth and instead focus on their medium-term aspirations”. 

READ: Unilever prepares for lasting changes in consumer behaviour from coronavirus

The Big 7 are battling to adapt their business models to a fast-changing and challenging environment where digital shifts have seen sector organic sales growth decline from an average of 7% in 2005-08 to 3% in 2017-19. 

“However, not all companies have been affected in the same way.”

Looking at Unilever, the group's growth engines are proving “unsustainable”, the analysts said, and their modest contribution, plus a lower exposure than peers to e-commerce and limited potential to drive a big improvement in profits all “add to our concerns that the challenges faced by Unilever will take time and money to fix”.

Following three years of earnings growth in the high single digits, Unilever's earnings growth is now expected to “considerably decelerate to a 3% level from 2021 onwards”. 

Shares in the Anglo-Dutch giant are pricing underlying sales growth of around 4%, according to UBS’s calculations, and this signals “earnings downgrades risks, leaving the shares vulnerable to some de-rating”, leading to bank cutting its rating to ‘sell’ from ‘neutral’ and its share price target to 4,000p from 4,150p.

Fellow FTSE 100 group Reckitt, on the other hand, “offers the most compelling turnaround story among the Big 7” after four years of deteriorating like-for-like sales and an extraordinary number of adverse one-off problems. 

Under new chief executive Laxman Narasimhan, RB has a “comprehensive plan, aimed at realizing the full potential of its leading PowerBrands in attractive categories” and has received an unexpected boost from the coronavirus pandemic

As such, the number crunchers expect sustainable 4-6% sales and 7-9% earnings per share growth by 2022, three years ahead of the group's original plan. 

“Growing relevance of the hygiene and health categories in a post Covid-19 world, dominant market share positions, large e-commerce operations, ambitious reinvestment programme and a rejuvenated organization underpin our confidence in the group's ability to meet its targets 3 years earlier than initially planned.” 

The shares were upped to ‘buy’ from ‘neutral’ and the target price to 8,400p from 5,700p.

UBS's analysis of industry data indicate that Danone and Henkel will join Unilever in underperforming relative to their long-term aspirations, while L'Oréal and Nestlé are thought to be best positioned to benefit from the ongoing industry transformation.

Quick facts: Unilever PLC

Price: 4515 GBX

Market: LSE
Market Cap: £118.38 billion

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