Morgan Stanley downgrades Unilever, questions its valuation

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Morgan Stanley downgrades Unilever, questions its valuation
Credit: © Reuters. - Morgan Stanley has downgraded its investment stance on Unilever (LON: ULVR ), questioning its current valuation as the consumer goods giant undergoes a portfolio restructuring.

The investment bank downgraded its stance on Unilever to ‘underweight’ from equal-weight’, while cutting its 12-month price target to £37.75 from £41.00 (ADRs to $48 from $52).

New CEO Hein Schumacher has made clear that, rather than break Unilever up into parts, his intention is to focus on the company's 30 Power Brands.

“While we think management's strategy looks sensible, it is unclear to us what will drive a further re-rating over the next twelve months,” analysts at Morgan Stanley said, in a note dated Feb. 27. 

“Valuation already seems to be pricing in successful execution. Management has been clear that reinvestment will take time, and the company operates in highly competitive categories.”

Additionally, following a stronger performance in recent weeks, Unilever now trades at a similar P/E level to the European Staples sector overall. 

“With correlation between organic sales growth and P/E particularly strong in this sector, the fact that Unilever's medium-term growth rate looks likely to be broadly consistent with the rest of the sector suggests that a re-rating is unlikely.”

Unilever’s shares fell 1.7% to £39.26 on Tuesday, but are still up over 3.6% year-to-date.

“The company has pockets of strong growth,” the bank added, but “we think OSG (overall sales growth) will struggle to hit the high end of the 3-5% growth target.”


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