Why does Unilever beat the pack on nasty surprises?

What is it with Unilever Plc and nasty surprises? Now that most of the major consumer goods companies have reported results, the UK maker of Knorr stock cubes stands out again for the wrong reason. Unilever was alone among its major peers in watching its shares fall in reaction to its announcement. This is a familiar story. And that's a major reason why investors balked at the firm's attempted 50 billion-pound ($68 billion) acquisition of GlaxoSmithKline Plc's consumer health-care unit last month.

Unilever has delivered an unusual number of ugly shocks over the last five years. The 7% drop on Jan. 17 in response to a potential jumbo deal in over-the-counter medicines was just one of the bigger ones. Last July's second-quarter results brought an early warning on inflation. The full-year numbers for 2020 delivered underwhelming margins. Annual results for 2019 and 2016 missed market expectations on revenue, as did third-quarter numbers for 2017. The share-price declines ranged from 4.7% to 7.2%. These setbacks help explain why Unilever's valuation is at the lower-end of its peer group.

True, the company hasn't been alone. Food manufacturer Kraft Heinz Co. also managed to send its stock down by more than 4% on six occasions in the same period. But Kraft is a business with particular difficulties. Its bad days included news of massive writedowns and a dividend cut, and its stock has fallen more than 60% since its failed attempt to buy Unilever in February 2017. 

Top of the Flops

Unilever and Kraft delivered more bad news than peers in the last five years

Meanwhile, Unilever's other peers simply don't inflict so many upsets. Its main rival, Nestle SA, has avoided any significant negative surprises over the last five years. The Swiss confectioner's shares barely moved on annual results last week. Analysts at RBC Capital Markets summed it up neatly: "Really boring (we love it)."

Announcements by Procter & Gamble Co. have pushed its shares down more than 4% just once in the last five years, while Reckitt Benckiser Group Plc, Colgate-Palmolive Co. and Danone SA sit in the middle of the bad-news rankings. (These tallies exclude any statements during the extreme market volatility of the early pandemic.)

The superficial account of why Unilever stands out is that the company has generally reported its results before its peers. That has made it more like the messenger that gets blamed when it warns of bad industry trends. 

Warning Sign

Bad news from Unilever still leaves scope for peers to disappoint

But timing isn't the full explanation. After all, Unilever's rivals still see their shares fall if they come out with bad results at a later date. Unilever may sometimes help lower expectations, but the cushioning effect on the rest of the sector isn't that pronounced. Something else is going on.

One obvious issue is that Unilever is now a very complicated global business, selling food and personal-care products in many countries. That's a lot for investors and analysts to get their heads around. Hence, some advocate splitting the company in two.

The Price of Consistency

Unilever's valuation has suffered due to a handful of disappointing results

But the main snag is probably that Unilever created a rod for its own back by promising to raise operating margins to 20% after seeing off Kraft's takeover approach. In consumer goods, investors are always going to be fixated on sales growth. Unilever's shares have historically been most sensitive to beating or missing forecasts for this metric, according to analysts at Jefferies. The company's pledges on improving profitability didn't excuse it from delivering decent revenue at the same time — and achieving both is huge challenge.

Raising prices or tightening marketing spend may improve margins, but at the expense of sales volumes. The chances of failure on either number increase when you're being judged on both.

Chief Executive Officer Alan Jope inherited the goal from predecessor Paul Polman and chose not to ditch it when he took over in January 2019. There was some external pressure to stay the course and scrapping the target would have looked like shirking a challenge. Nevertheless, the decision led to an accumulation of setbacks that have damaged trust with investors — culminating in their thumbs-down for a consumer health-care pivot.

With activist Nelson Peltz circling, Unilever is under pressure to up its game. If it's tempted to make fresh promises, it should make ones it can easily keep.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper. @hughes_chris

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.