For those who closely follow emerging markets, the last few months have been full of action. However, some of the reports on the state of emerging economies have been confusing. On the one hand, we can see that many currencies are weakening, and things are deteriorating in part due to softness in China and slowing growth. On the other hand, several very large companies such as Procter & Gamble (PG +2.30%), Kimberly Clark (KMB +3.72%), and Unilever (UN +0.00%) that rely on emerging economies for much of their growth have delivered strong performances in many key markets. What's going on?
US companies: Procter & Gamble and Kimberly Clark
Two American consumer-goods heavyweights recently reported earnings, and the numbers don't look too bad. Procter & Gamble, the world's largest maker of consumer goods, reported earnings that were down year-over-year along with higher sales spurred by strength in emerging markets. Second-quarter net income fell by around 16% to $1.18, although excluding items, P&G's EPS of $1.21 beat the consensus slightly. Sales were up 0.5% to $22.3 billion, in-line with estimates. P&G left its full-year forecast for organic sales growth of between 3% and 4% intact.
P&G's emerging market sales in particular were up a healthy 8%, which is an important growth driver for the company as it derives some 40% of its sales from developing economies. This is a smaller percentage than Unilever's 60% for instance, but still significant. As expected, currency fluctuations had a sizable impact on P&G's bottom line, shaving some $0.11 off quarterly EPS. Still, demand seems robust, which is curious considering the weakening currencies in many growth markets.
Kimberly Clark's fourth-quarter report also beat analysts' expectations, with EPS of $1.40 roughly doubling from last year's $0.68. Organic sales were up 5% overall. In the personal care segment, international sales volume was up 9%, driven largely by strong demand in China, Russia, and much of Latin America. For the consumer-tissue segment, which includes brands such as Kleenex tissues, international sales volume was up 6% driven by strong performances in Brazil and Venezuela .
Unilever's take
Reports from the other side of the pond show that a similar process is taking place, at least according to consumer-goods giant Unilever. Growth may be slowing down in certain emerging markets, but overall, the company is reporting solid organic sales growth. The Anglo-Dutch company threw off a profit warning not too long ago which had many investors deeply worried.
Opinions are divided on Unilever's latest report. For some, the report came as a relief, as the slowdown was not as bad as feared. For others, it was still a disappointing quarter. Indeed, the company's overall organic sales growth of 4.1% was lower than the 7.8% growth recorded in the last quarter of 2012. Organic sales growth in emerging markets specifically slowed as well, down to 8.4% from 10.8%.
Unilever expects volatility in emerging markets currencies to continue throughout 2014, which may prove a drag on sales in some places. Specifically, the company expects continuing weakness in Vietnam, Thailand, and South Africa. Stronger sales performances were seen in Russia, Turkey, China, and Indonesia. Once again, this is confusing considering the worrying situation in Turkey and the expected economic slowdown in China. In essence, it seems that things are going poorly in many emerging markets in macro-economic terms, but consumers in many of these areas are still spending money.
The bottom line
There are definitely some mixed messages on emerging markets circulating through the financial media at the moment. On the one hand, we can clearly see a great deal of currency volatility in many developing economies at the moment, which in combination with slowing growth has put a drag on consumer-goods sales. On the other hand, demand remains robust in many other developing economies and the slowdown has not been nearly as bad as some analysts have proclaimed. Investors should keep a close eye on the numbers reported by international consumer-goods conglomerates to see how the situation progresses.
