We reaffirm our Neutral recommendation on Unilever N.V. ( UN - Analyst Report ) following the appraisal of its third quarter 2012 results. This fast-moving consumer products giant posted robust underlying sales growth and performed well in the emerging markets despite global macroeconomic headwinds and unfavorable foreign currency translations.
Why the Reiteration?
Unilever posted healthy third quarter 2012 sales results and recorded organic (excluding the impact of acquisitions and disposals) sales growth of 5.9%. The increase was driven by both volume and pricing gains of 3.4% and 2.4%, respectively. Increased investment in innovation and brand building also contributed to the growth. Underlying sales expanded 12.1% in the emerging markets while sales in the developed markets declined in the quarter.
Overall, we are optimistic about Unilever’s wide portfolio of globally recognized flagship brands, which caters to a fast growing consumer goods sector. This helps the business segments to maintain a dominant share in the market. Unilever has been strengthening its portfolio through a number of acquisitions.
In addition, Unilever has been divesting its businesses to shed off its non-core businesses, thereby optimizing resources and allocating them to the more promising markets. The company has already 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 August 2012. Recently, Unilever agreed to sell its Skippy peanut butter business to Minnesota-based meat producer Hormel Foods Corporation ( HRL - Analyst Report ) .
Unilever is also 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 and focus on expansion in these markets.
Unilever is reducing its presence in the developed markets, which have become saturated and are experiencing sluggish growth. The macroeconomic climate of these developed nations is also not conducive, in addition to their disappointing volumes. Moreover, debt crisis in Europe and ongoing economic challenges along with austerity measures taken by the European government can badly impact the company’s European supply chain and the operations of the company.
The company faces high commodity and raw material costs that are crippling its margins over many quarters. The company’s exposure to international markets also invites unfavorable foreign currency translations, which remain a significant overhang.
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