Unilever simplification strategy faces investor test on returns and valuation

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Unilever simplification strategy

Highlights

Unilever trades at 11.5 times enterprise value to core earnings, below Procter & Gamble (14.8), L'Oreal (17.5), and Coca-Cola (22.7), underscoring a continued conglomerate discount.
Unilever spins off its ice cream division and finalizes a roughly $65 billion deal in March to merge its food business with McCormick, leaving it with an almost 10% stake and shareholders with about 55% of the combined entity.
Sales volumes reported by Unilever in July reach their highest level in over a decade, but concerns persist about its ongoing exposure to slower-growing food categories post-merger.

Portfolio overhaul sharpens focus on execution

As reported by Reuters, Unilever is trying to convince investors that a simpler business structure can produce better returns after years in which more diversified consumer groups have traded at lower valuations than category specialists.

The maker of Dove, Axe and Cif trades at 11.5 times enterprise value to core earnings, according to LSEG data. That compares with 14.8 for Procter & Gamble, 17.5 for L'Oreal and 22.7 for Coca-Cola, indicating that investors continue to place a premium on companies with narrower product portfolios.

Under CEO Fernando Fernandez, the company has accelerated its retreat from food. Unilever spins off its ice cream business and in March strikes a roughly $65 billion deal to combine its food division with U.S. spice maker McCormick, a transaction that leaves the British group with an almost 10% stake in the combined company and its shareholders with about 55%.

That shift does not remove a weak business, but it does reduce exposure to a historically higher-margin category. Investors and analysts now say the main question is whether faster-growing beauty, personal care and home products can offset that change and support a re-rating.

Consumer sector valuation gap remains in focus

Fund managers say the market remains cautious about turnaround stories and wants several quarters of strong volume growth before changing its view. Dan Hanbury, a portfolio manager at Ninety One, says Unilever needs clearer evidence that the business is improving, while Will James at Guinness Global Investors says continued execution could lead to a degree of re-rating.

That investor thinking reflects a broader trend already seen in industrial groups such as General Electric and Siemens, where simpler structures are meant to remove the so-called conglomerate discount. In consumer goods, diversification is no longer seen as strongly as before as a buffer against changing tastes, while category leaders are increasingly rewarded for concentrating investment, innovation and marketing on fewer product lines.

Investors often point to Procter & Gamble as a model after it exits food, streamlines its brand portfolio and then delivers stronger growth with a valuation premium for much of the following decade. Akeel Sachak, global head of consumer at Rothschild & Co, says focus on a single category can improve cost efficiency and innovation.

Unilever reports improving results in recent quarters, and in July says sales volumes reach their highest level in more than a decade. Even so, Barclays analyst Warren Ackerman says some shareholders remain uneasy about continued exposure to the slower-growing food category through their stake in the company created by the McCormick merger, while Fernandez says each quarter of delivered numbers and progress toward closing the transaction should help reveal Unilever's value.

Our earlier report on Goldman Sachs’ “shared favorites” basket highlighted how a small set of stocks held by both hedge funds and mutual funds has outperformed year-to-date as institutional positioning shifted into the third quarter. It also noted a pronounced tilt toward financials—reflected in additions like Capital One alongside Visa and Mastercard—and pointed out that the basket typically trades at a valuation premium versus the broader S&P 500.

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