Image source: Unilever plc
Unilever (LSE: ULVR) shares have not performed very well. In the last five years, they have fallen about 10%.
However, an investor who is bullish on stocks is Fundero Equity portfolio manager Terry Smith. He believes that, after their recent fall, they have a lot of potential.
“Many things in its favor”
At Fundsmith's annual meeting in February, Smith and his colleague Julian Robins (Fundsmith's head of research) were asked which stocks in their portfolio have the most potential right now.
Their answer was Unilever. Smith and Robins explained that after years of suboptimal management, Unilever is an unloved company.
However, they said that, with a new management team, led by Hein Schumacher, the consumer goods stock has “a lot in your favor”.
They also noted that the new management team has outlined plans to make Unilever a more agile and efficient company.
And they believe this is the right strategy for the company, which in recent years has destroyed a lot of shareholder value through poor acquisitions (e.g. Dollar Shaving Club For one thousand million of dollars).
Unleashing Unilever's full potential
Now I have to admit that this answer surprised me a little. Since Fundsmith owns some really interesting tech stocks, such as microsoft, Appleand AlphabetI didn't expect Unilever to be the company they are most optimistic about.
But I can see your logic. In recent years, Unilever has lost its way a bit. This is reflected in its share price.
But the new management team intends to change things. The aim is to unlock Unilever's full potential by increasing investment behind its 30 'Power Brands', divesting non-core brands and driving a sharper focus on performance with clear objectives across the organisation.
Ultimately, management wants to do “Fewer things are better, with greater impact.”.
There is much to do, but we are moving quickly and urgently to transform Unilever into a consistently outperforming company.
Hein Schumacher, CEO of Unilever
In terms of valuation, there is room for a rerating if management can execute its plan. Currently, the forward-looking price-to-earnings (P/E) ratio using next year's earnings forecast is just 15.9.
If the company was able to demonstrate that it is firing on all cylinders, I wouldn't be surprised to see the multiple rise to around 20, or higher, where it was a few years ago.
I'm grabbing
Of course, the new leadership team will have their work cut out for them to turn things around.
In today's environment, where money is tight for many people, many consumers are opting for cheaper consumer goods brands. This could put pressure on sales growth in the short term.
But I'm optimistic about the potential here. So for now I'll hold on to my Unilever shares.
