We have upgraded our recommendation on Unilever Plc. ( UL - Analyst Report ) to Outperform from Neutral, following its impressive third quarter 2012 results.

Despite high input costs and a tough currency environment, Unilever posted healthy underlying sales growth of 5.9% on the back of both volume and pricing gains. Increased investment in innovation and brand building also contributed to growth. Organic sales in the emerging markets improved as well, with new product innovations and consistent market share in the industry.

Unilever commands a wide portfolio of globally recognized flagship brands, such as Axe/Lynx, Lipton, Knorr, Dove, Lux, Rexona and Sunsilk, catering to a fast growing consumer goods sector. This helps the company to maintain a dominant share in all the business segments. In addition, the company has been focusing on brand building through innovations. Over the last two years, product innovations have been contributing more than 30% of the revenues.

Unilever has been strengthening its brand portfolio through a number of acquisitions. The acquisition of the Personal Care business of Sara Lee in the fourth quarter of 2010, added leading brands like Radox, Duschdas and Neutral to its portfolio in Western Europe.

Unilever’s acquisition of Chicago-based Alberto Culver in May 2011 made it the world’s leading company in hair conditioning, the second largest in shampoo and the third largest in styling. With the acquisition of 82% stake in the Russian brand Concern Kalina in December 2011, Unilever strengthened its portfolio in the Russian personal care market.

Further, the company regularly enhances its brands in new emerging markets of Brazil, India, Indonesia, Turkey, South Africa, China, Mexico and Russia, as the company faces sluggish growth in developed nations. The management is taking advantage of the increasing population and growing per capita income of the emerging markets and emphasizing on expanding in these markets.

Though we expect an uncertain macro-economic environment going forward, the company remains bullish on its growth prospects and expects sales growth with strong volume gains and solid free cash flow in the near-term. The company’s solid fundamentals and continuous innovation in all the business segments add to the growth prospects.

Unilever thus holds a Zacks #1 Rank (short-term Strong Buy rating), in contrast to its peer Procter & Gamble Co. ( PG - Analyst Report ) , which holds a Zacks #3 Rank (short-term Hold rating).