Does Unilever's Beat Signal an Emerging-Markets Turnaround?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Some time ago, Unilever (NYSE: UL  )  delivered a warning that had investors quite worried indeed. A bellwether for emerging-markets growth, and a big one at that, the Dutch-English company stated in its second- and third-quarter reports that it saw growth in many emerging markets slowing down, with demand for consumer goods waning.

Another European consumer-goods heavyweight, Heineken (NASDAQOTH: HEINY  ) , presented a similar picture. Yet Unilever's fourth-quarter and full-year 2013 report was nowhere near as bad as expected, with underlying sales growth in emerging markets putting up a solid performance. Are emerging markets on the upturn again?

Mixed messages
To put the latest numbers in perspective, let's take a look at some of Unilever's recent press releases. For the second-quarter report, CEO Paul Polman seemed fairly adamant that emerging markets growth was slowing down, apparently due to macroeconomic difficulties in many of the company's core markets. Then, before releasing its third-quarter report, the company threw off its first profit warning since 2004, saying that a slowdown in emerging markets growth would lead to underlying sales growth of between 3% and 3.5%. This compared rather poorly with the 5% delivered in the second quarter.

The buzz spread around Wall Street quickly. Due to Unilever's size, and the fact that it derives some 60% of sales from emerging markets, the company is closely watched by analysts and investors for clues as to what's going on in developing economies. As such, the news had many commentators speculating about a probable slowdown in emerging markets growth. However, the latest report is not nearly as bad as was feared.

The metric most closely watched by analysts in Unilever's reports is generally underlying sales growth, as it tries to eliminate the effect of currency fluctuations. These came in above analyst expectations, with overall underlying sales growth up a healthy 4.3% and in emerging markets specifically up 8.7% for the full year.

Encouragingly, most of the sales increase came from higher volume, meaning the company is actually selling more products. The company saw especially strong demand for its personal-hygiene segment, with things such as hair care products seeing strong demand in Brazil especially. In order to sustain this growth, the company will be investing a larger amount of money than usual in developing its emerging markets footprint. Investors were clearly relieved by the report, sending the stock up around 3.5% in U.S. trade.

Industry trends
If Unilever's picture of emerging markets is somewhat hazy for last year, the same is true for Heineken. The world's third-largest brewer is highly dependent on emerging markets for growth and is also a useful barometer for the developing world. The company's emerging-markets results were fairly poor in its most recent earnings report, with the exception of its Asian business.

Africa and the Middle East didn't perform too well, with organic revenue down 3% for the quarter. Management cited ongoing unrest in Egypt and the Democratic Republic of Congo as a drag on sales, while inflation and high unemployment slowed sales in Nigeria. Emerging Europe did even worse, with group beer volume down 7% organically due to soft spending in Russia, Romania, and Greece. Asia-Pacific continued its strong performance following the acquisition of Asia-Pacific Breweries in 2012.

Procter & Gamble, Unilever's key U.S. competitor as a highly diversified consumer-goods company, is also dependent on emerging markets for its revenue stream, together accounting for some 39% of net sales. Also comparable was its emerging-market sales growth for 2013, which was around 8% for the company's top 10 developing economies. Looking at these numbers, one would think there is little to worry about in terms of the developing world slowing down.

The bottom line
Unilever's earnings reports are always closely watched for clues as to the state of the global economy. After an initial scare before its third-quarter report, Unilever's full-year figures have turned out not too bad at all. While growth does seem to be slowing down somewhat in some emerging economies, the company is still doing excellent business around the world. As such, investors who are bullish on emerging markets growth should consider Unilever as a relatively safe play.

Our top stock for the year ahead
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2806736, ~/Articles/ArticleHandler.aspx, 8/29/2015 11:07:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Daniel James

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.

Today's Market

updated 13 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:06 PM
UL $40.35 Down -0.26 -0.64%
Unilever CAPS Rating: ****
HEINY $39.31 Down -0.37 -0.93%
Heineken N.V. (ADR… CAPS Rating: ****