Fat Prophets take some profits

Unilever saw underlying emerging markets sales growth accelerate in the third quarter with this area accounting for over a half of sales. This is as the company has started to push through price increases but still managed to see overall volume growth. Acquisitions are paying dividends and helped the personal care division become the company’s biggest product category. With a strong stock price performance we recommend members sell half.

Unilever stretches from ice cream, soap, hair products, cleaning products to mayonnaise and tea. What all these categories have in common is that they are consumer focused and with strong brands.

The buyers of Hellman’s mayonnaise, Cornettos, Dove soap, Domestos, Knor sauce, Lipton’s tea and TRESemme shampoos don’t easily turn to other products. However, consumer markets in the West have been weak while commodity price pressures have been strong.

To remain competitive the group saw negative pricing growth for much of 2009 and 2010. This enabled volume growth in 2009 to remain at 2.3%, while in 2010 volumes rebounded strongly with growth of 5.8%.

As we noted in our last look at the group (FAT UK 399, 18 Aug 11) the onus has now changed to pushing through price increases which would be expected to dampen volume growth. This is to protect margins as commodity price pressures are passed onto consumers.

 

The current short term retracement will likely find support at the 50 day moving average of 2075p. Should this bullish scenario unfold, we would expect a retest of the all time high of 2162.9p to occur over the near term. The bullish moving average cross in place since April is suggestive of broader term momentum to favour the upside.



With reference to the weekly chart, the longer term trend is clearly upwards. Once this pause in trend is complete, we would expect a resumption of the uptrend. A sustained break above the 2162.9p resistance level, would likely result in the commencement of a new leg higher to follow.

In the first half of 2011 pricing growth was 3.5% while volume growth stayed positive despite this at 2.2%. Thus H1 underlying sales growth came in at 5.7%. In the third quarter of the year pricing growth came in at 5.8% which combined with volume growth of 1.9% meant an overall underlying sales growth of 7.8%. This can be seen in the chart below:

Unilever Q3 sales growth

The third quarter performance therefore looks robust as the group was able to push through strong price increases but still see volume growth.

A key attraction of Unilever and the reason it has held up well in terms of volume growth is the company’s emerging markets exposure. Even in the difficult year of 2008 volumes of products sold still held up with an increase of 0.1%.

In the third quarter emerging markets sales were at 53% of turnover and saw underlying sales growth of 13.1%. This compares to underlying sales growth in developed markets of just 2%. Thus emerging markets were the key driver of the overall 7.8% underlying sales growth in Q3.

Turning to the group’s product categories and the above chart shows that Personal Care was the strong performer with underlying sales growth of 11.3%. This was followed by Homecare, Foods and finally Beverages and Icecream.

Of the 11.3% underlying sales growth in Personal Care 6.2% was accounted for by volume growth with 4.8% down to price growth. This looks like a very strong result for Unilever with the driver of the business being ascribed to “innovation roll-outs”.

Personal Care became the biggest division for Unilever at around a third of sales in Q3. This was on the back of strong sales growth and the takeover of Alberto Culver which specialises in haircare products like TRESeme.

The US$3.7bn takeover was completed in May 2011 and so the full effects were felt in the third quarter. The deal makes Unilever the “world’s leading company in hair conditioning, the second largest in shampoo and the third largest in styling”.

Unilever also completed the purchase of the Personal Care business of Sara Lee for Euros 1.275bn in December 2010. The deal is expected to boost the group’s position in skin care and deodorants which provides scope for the role out of this area in emerging markets.

Turning to the other parts of the business and Home care saw 9.2% underlying sales growth which was an improvement on the last two quarters (Q1 6% and Q2 7.4%). This was mainly due to price growth of 6.7% although the group says that the market remains very price competitive.

Savoury, Dressings and Spreads saw 6.2% underlying sales growth as volume fell back 1% and the group passed on a 7.3% price increase. The group attributes this to competitors taking longer to put up their prices than Unilever. An example of how the company’s products are being sold into new markets is the marketing of Hellmann’s for use in Guacamole in Mexico.

Lastly Beverages & Ice Cream saw 4% sales growth as Unilever boosted prices by 4.6% and saw a 0.5% fall in volume. Magnum ice creams was launched in the US and Ice Cream also saw strong double digit growth in emerging markets. Lipton tea being marketed in Russia provides an example of how the group is selling brands into emerging markets.

Overall then the objective of pushing through price increases has been successful although two divisions did see slight volume falls. Personal Care and emerging markets are the key areas driving the business and it is important that Personal Care should be more brand dependent than other areas. Consumers may change their cleaning products due to price but when it comes to personal grooming the product is key.

Turning to the valuation and since we recommended Unilever fifteen months ago the stock has performed well. The shares now trade just under £21 against our buy of £17.80 and have paid out dividends of £0.9477.

This is as the market has seen that Unilever can pass on pricing pressures and is seeing good volume growth. The P/E rating for next year is around 14.4X next year’s earnings which falls to 13.3X 2013’s earnings and the rating for 2015 is 11X earnings. This is not overly expensive but with the robust stock price performance recently we recommend taking part profits.

Accordingly, we recommend Unilever as a sell-half for all members.