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Short-term trends power Unilever shares

Prospects for long-term growth at the consumer goods group need to be considered in isolation from the factors that drove the third-quarter fillip
October 20, 2015

How well the business mix at Unilever (ULVR) can be successfully re-engineered is an important factor when analysing the consumer goods conglomerate's prospects. At present, the lower-margin refreshment and home care segments outsell the higher-margin personal care and food divisions. Addressing this will be key, given chief executive Paul Polman's prediction of "no immediate sign of getting help from an improving global economy". But product innovations in the two higher-margin areas were highlights of the group's third-quarter update, alongside a trio of incidental, short-term factors that massaged the numbers.

IC TIP: Hold at 2,905p

 

The foods division, which has been a consistent laggard in terms of underlying sales and profit growth in recent years, now has a baking, cooking and spreads unit which was launched in July. An early positive sign is the fact it helped the company gain market share in margarine in the period under review, although more will be needed from the unit in the coming years.

Emerging markets are key for Unilever's growth and more so than ever with a disinflationary western Europe acting as a drag on turnover. The positive third-quarter update was in part due to higher sales ahead of announced price increases in Latin America. While this is likely to mean subdued numbers in the fourth quarter or first quarter of next year, the company said there had been "rapid development" in its online sales in China, which should help sales, while Turkey returned to double-digit growth thanks to ice cream, leaf tea and hair care.

 

Berenberg says...

Buy. We issued a note in September ahead of the third-quarter update upgrading the company to a buy. While we are conscious there were one-off factors that flattered the numbers in the third quarter, such as seasonally strong ice cream sales and soft comparators in China, there was still improving momentum in underlying growth with those things stripped out. The company is also concentrating on product innovation and it should see higher growth from e-commerce. While we do not see a quick rebound in emerging market growth, we believe Unilever is past the trough of group organic growth. The product mix is theoretically bad, but the momentum in personal care - a higher-margin activity - is one factor that can offset that, together with the high-margin new baking unit.

 

Liberum says...

Sell. The company's China business was down some 20 per cent in the third and fourth quarters last year, so it is no surprise that there has been growth there now, and the ice cream sales are seasonal, so this won't be repeated in the fourth quarter. Unilever may do slightly better this year than we had expected, but even the positive effect of the weaker euro has almost disappeared so the company possibly has negative earnings momentum at present. Also, while margins can be improved in lower-margin areas, the biggest percentage of profit is generated in food and personal care where margins are high and so are likely to be able to grow less. A low-growth world is likely to mean lower bottom-line growth.