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Unilever Needs A Soft Global Landing

Published 18/10/2018, 11:29
Updated 14/12/2017, 10:25

Summary

Unilever’s sales grew at a solid though lower than expected pace, as global economic pressures began to bite

Argentina trims volumes

Unilever (LON:ULVR) active global exposure means it can scarcely evade the impact of geopolitical and economic flare-ups. This time, Argentina’s debt woes took an unexpectedly large chunk out of group volumes. The result was a 50 basis-point short fall in third-quarter (Q3) underlying sales relative to expectations of a 4.3% rise on the year.

Aside from a solid, albeit weaker than forecast sales miss, the consumer institution barely put a step wrong in the quarter, again leaving out the abandoned consolidation plan. Steady progress enables Unilever to retain its 3%-to-5% underlying sales growth range for the year – signalling that the lower end of the range is more likely – and CEO Paul Polman continues to see the group on track for longer term goals too. Even so, investor unease remains.

Headwinds rise

Despite adding 21% between the end of the spring stock market washout in late March and a top towards the end of August, Unilever shares have floundered since. They’re now trading slightly lower for the year.

Vindication of its decision to reject Kraft's (NASDAQ:KHC) $143bn bid last year still holds. The group’s market value surpassed the likely total value of the U.S. companies by as much as $25bn in September and was still well over $10bn above at Wednesday’s close. In time, a return to more stable global economic conditions would imply a Unilever value even higher than this year’s peak given that its operating margins are pulling away from rivals.

The Anglo-Dutch group has tacked on some 200 basis points over two years. Returns on investments are also tracking on the topside of peer averages as Unilever pushes ahead with a long-tail strategy of making numerous but relatively small acquisitions. But global headwinds appear more pressing to investors right now.

Volume declines look set to become a long-term, if not permanent norm in Argentina, whilst currency impact, which shaved 5.2% off turnover in Q3 will hit 2018 sales by 7% and earnings “a little more”.

Commodity costs—another link to unmooring emerging economies—have also now been flagged as stronger headwind.

Soft landing preferable

The chief concern is that after a period of relative stability in its main territories, offering Unilever a window to right-size and clinch efficiencies, rising cloud cover over economic growth could begin to erode margin progress.

Advances since 2016 still leave Unilever around average in Europe for a multi-line consumer goods maker of its size. Its operating margin over the last twelve months is 15.5% according to Refinitiv data. Reckitt Benckiser leads at 23.3%.

Unilever’s edge for investors is historical dividend leadership that has essentially seen a roughly 8% compounded growth rate since 1952. To keep that edge, and pace inflation expectations that have lifted 10-year Treasury yields closer to Unilever’s 3.8%, an orderly moderation in global growth would be preferable. Unfortunately, it’s a less predictable, more volatile one that could be approaching, looking at developments this year. Unilever’s stock could keep drifting lower despite solid operating progress.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions."

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