I'll be the first person to say that you can't evaluate a turnaround on the basis of one or two quarters. By the same token, valuations in turnaround situations do rely in part on investor confidence, and Unilever (NYSE: UL ) isn't doing itself any favors in that regard by posting another quarter that leaves some investors wanting more.
Whereas growth was the concern in the first quarter, the concern this time around is on the margin side. Underlying sales were up 3.9% on a 0.8% improvement in pricing, and that's not terrible in the food world, though American companies like Kraft (NYSE: KFT ) and Kellogg (NYSE: K ) managed better. Growth was once again buoyed by emerging markets as the Africa/Asia segment posted better than 7% volume growth and lifted up the sub-2% volume growth in Europe and the Americas.
Margins, though, weren't so good. Adjusting out various restructuring items and the year-ago Slim-Fast write-off, operating profits were actually down about 3% this time out. It's valid to observe that the company has been intending to spend more heavily on advertising and promotions to build its brands, but that's a double-edged sword. First, it costs money. Second, it can lead to boom/bust cycles and that's been a problem for Unilever in the past.
There are still reasons to like the turnaround potential at Unilever. It's not yet up to snuff on margins, and simply improving enough to be average would definitely help the bottom line, cash flows, and valuation. What's more, this is a company with solid brands and a very attractive position in emerging markets -- the only arena where any large food company can hope for better than mid-single-digit growth for the long haul.
I can still see why Unilever would be appealing to value-oriented investors, and that sizable dividend doesn't hurt. By the same token, investors who are willing to take a somewhat broader look might want to consider other European food/beverage ideas like Nestle and Cadbury Schweppes (NYSE: CSG ) . They're not trading at the same valuation as Unilever, but they're producing a bit more in terms of current results.
For more Foolish food for thought:
- Kellogg and the Myth of Safe Stocks
- Kraft Needs to Craft More Growth
- Looking for Leverage With Unilever
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).