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We reaffirm our Neutral recommendation on fast moving consumer goods giant Unilever Plc (UL - Analyst Report) following an appraisal of its first quarter 2013 results.
Why the Reiteration?
On Apr 25, Unilever reported strong first quarter 2013 sales and recorded organic (excluding the impact of acquisitions and disposals) sales growth of 4.9%. The increase was driven by volume and pricing gains of 2.2% and 2.6%, respectively. Increased investment in innovation, improved product quality and introduction of brands in new markets contributed to the growth. Underlying sales expanded 10.9% in the emerging markets while sales in the developed markets declined in the quarter due to global macroeconomic headwinds.
Unilever witnessed strong growth in Home Care and Personal Care categories and modest growth in the Refreshment category, despite weak ice cream sales in Europe. The Foods category was sluggish due to weak performance of spreads, which offset improved performance in savory and dressings.
Overall, we are optimistic about Unilever’s wide portfolio of globally recognized flagship brands, which caters to a fast growing consumer goods sector. Unilever has also been strengthening its portfolio through a number of acquisitions and divesting its non-core businesses. The company divested its European frozen foods business long back in 2006 and sold its North America frozen meals business (brands of Bertolli and P.F. Chang) to ConAgra Foods Inc (CAG - Analyst Report) in Aug 2012. Later in Mar 2013, Unilever agreed to sell its Skippy peanut butter business to Minnesota-based meat producer Hormel Foods Corporation (HRL - Analyst Report), which is expected to close in 2013.
Unilever is expanding its presence in the emerging markets of Brazil, India, Indonesia, Turkey, South Africa, China, Mexico and Russia in order to take advantage of the increasing population and growing per capita income of the emerging markets. Last week, Unilever agreed to increase its stake in its Indian unit, Hindustan Unilever Limited to 67.28% from 52.48% for Euro 2.45 billion.
However, a decline in spread sales volume and an uncertain macro-economic environment are denting Unilever's profits. The company has posted weak sales in its spreads business compared to the last few quarters. The company also closed its spreads manufacturing plant in Atlanta in Jun 2013 due to a sluggish spreads business. In addition, the developed markets are nearing saturation and therefore experiencing sluggish growth. Unilever is thus reducing its presence in these markets owing to disappointing volumes. Moreover, the debt crisis in Europe, commodity cost headwinds and unfavorable foreign currency translations remain a significant overhang. Unilever has a Zacks Rank #4 (Sell).
Stocks That Warrant a Look
While we prefer to avoid Unilever until we see signs of improvement, another food company Flower Foods Inc (FLO - Snapshot Report) carrying a Zacks Rank #1 (Strong Buy), is worth considering.