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Two FMCG stocks which are right at the centre of the inflation turmoil

Story Highlights

Two market leaders in the fast-moving consumer sector, Unilever and Reckitt Benckiser (RB), have been hit hard by inflation, but could they be a good long-term bet?

Unilever (GB:ULVR) and Reckitt Benckiser (GB:RKT) are British multinationals that own many well-known brands – but like many companies they are facing considerable headwinds in the current economic climate.

But could they be a good bet for longer-term investors?

Unilever’s margins are shrinking, and some shareholders are not happy. On the contrary, RB has managed to keep its stock returns positive and margins on track.

Let’s look at the detail for both of these stocks.

Unilever and Reckitt Benckiser shares – long-term performance

Unilever’s shares have been in a zig-zag movement for the last three years, and failed to bounce back during the market recovery post-COVID lockdowns. The shares were down by 14% over three years.

However, in the last six months, the stock has a turnaround and is trading up by 13.3%. Most recently, the shares went up after the company announced activist investor Nelson Peltz would join the board, part of the company’s strategy to drive value for shareholders.

BofA analyst Eva Quiroga believes “Peltz is likely to focus on improving the organic top-line growth, which is described as the company’s ‘Achilles’ heel’.” Eva has a Hold rating on the stock.

Meanwhile, Reckitt Benckiser’s stock has been climbing slowly but steadily over the last three years. It proved to be a defensive stock in this period.

The stock is up by 5% in the last three years and by 9.8% in the last three months.

Facing the storm – Prior performance

In its 2021 full-year results, Unilever’s operating margin was down by 10bps at 18.4%. This was a result of higher raw material, packaging, and distribution costs fuelled by disruptions in the supply chain caused by the pandemic.

The company said cost inflation was the biggest challenge of the year 2021, and that this will continue to impact its results in 2022 as well.

“Their (full-year) costs are going to quadruple versus a year ago. That’s why the pricing needs to be so high, and that’s why the price is going to go much higher,” Barclays analyst Warren Ackerman said. “This is not the peak.”

In April 2022, Unilever increased its prices by 16.4% in Latin America and emerging markets, followed by 8.5% in North America.

Unilever is expecting the increased prices, along with the savings program will help put its margins back on track in 2023 and 2024. For the full year of 2022, the company expects the underlying operating margin to be at the bottom end of the guidance range of 16-17%.

RB has more focus on health, hygiene, and nutrition products. This has worked in favour of the company in recent years, as these areas tend to yield higher margins.

In April 2022, RB shared its Q1 trading update and was off to a strong start. The group’s net revenue was up by 5.6%, mostly driven by the health & nutrition segments.

The outlook remains positive with revenue growth expected at the upper end of the guidance numbers, i.e. 1-4%. Operating margins are also expected to be in line with market expectations.

Recently, the US market faced a supply shortage in its infant formula market as the top player, Abbott’s (NYSE:ABT) production was stalled. This led to an opportunity for RB to expand its market share. This has helped the company to boost its top-line growth, which will be reflected in its half-year results due this month.

View from the city

According to TipRanks’ analyst rating consensus, Unilever has a Hold rating based on 14 analyst ratings. It has three Buy, eight Hold, and three sell recommendations.

The average Unilever price target is 3,870p, which is 0.88% down from the current price. The stock price has a high forecast of 4,600p and a low forecast of 3,300p.

According to TipRanks’ analyst rating consensus, RB stock has a Moderate Buy rating. The stock has total of 14 analyst ratings, including 11 Buy, two Sell, and One hold recommendation.

The average RB price target is 7,323.21, with an upside potential of 14.02%. The high and low forecasts for the price is 8,600p and 5,300p, respectively.

Conclusion

The fast-moving consumer goods sector is hit hard by inflation and the slowdown in consumer spending. But the sector has the strength of multiple brands and customer loyalty. They have the pricing power to navigate through difficult times.

Both companies are reliable names, and will deliver steady growth over time. Overall, the stocks are suitable for long-term investing.

Also, don’t forget the dividends! Both companies have their dividend yield above the sector average of 1.65% which makes them a decent option.

Disclosure

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