Jefferies zigzags by upgrading Unilever on strong cashflow guidance

Jefferies has upgraded Unilever to ‘buy’ from ‘hold’ and raised its price target from 3,400p to 3,700p, saying that while other analysts "zig... we choose to zag".

New guidance from the consumer goods giant amounts to what Jefferies said was one of the strongest combinations of earnings per share and free cash flow yield in the sector.

“Far from guidance being a capitulation to bond proxy status, we see a growth posture being maintained in the form of robust marketing investment, capex>depreciation and ongoing share momentum,” the investment bank said.

“Relative to which market reaction has been one of indifference. While others zig on ULVR, we choose to zag.”

Unilever remains least loved in the bank’s European big cap food and household and personal care coverage, Jefferies analysts felt. While others see the company veering away from growth, they see a "decisive move" in favour of margin and cash.

The company is coming off a five year period during which its capital expenditure has averages twice depreciation and marketing, with sales rising by 80 basis points, though capex is set to remain ahead of depreciation while marketing "should be broadly maintained".

India was one area of concern, where sales forecasts are downgraded by 170bps in the fourth quarter and 30bps in 2017 reflecting a 20% sales decline at the end of this year and into the beginning of 2017.