Unilever Earnings Preview: What Aren’t We Watching?

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Unilever

Unilever (NYSE:UL) releases earnings this Thursday which will give us a glimpse of revenue growth across geographies and product segments. As the second largest consumer goods company in the world after Procter & Gamble (NYSE:PG), we look for volume growth metrics and pricing trends after weak results from Europe recently. Given Unilever’s spate of acquisitions, we will also watch for signs on how these will impact the margin outlook.

We value Unilever with a $35 Trefis price estimate of its stock at roughly 10% premium to its current market price. Here we revisit some of our concerns with regards to Unilever’s upcoming results.

What’s on our radar

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1. Overall volume growth

While sales grew by 4.3% in January to March 2011 compared to the same period last year, the underlying volumes grew by only 2.5% with price increases contributed the remaining 1.8%. A low volume growth hints at market share losses, which could have a more lasting adverse impact on the business as a whole. Market share losses due to lower-priced substitutes typically take longer to regain than the economic recovery as consumers who experience acceptable quality at reduced prices do not revert back to premium brands easily.

2. Savory, Dressings & Spreads division

In the first quarter of the current fiscal year, Unilever’s Savoury, Dressings & Spreads division, which makes up over 41% of its stock value, witnessed a 0.4% decline in volumes on account of a 2.6% average rise in prices effectively translating into a 2.1% growth in sales.

While Unilever has been increasingly focusing on its personal and home care business as evident by the numerous acquisitions in this space, it cannot afford to go easy on foods segment, which currently contribute the most to its business.

3. Western Europe

While emerging markets have been growing at double-digits, Western Europe market needs to be watched. In spite of negligible price increases, volumes tanked by a meaningful 2.8% leading to a 2.7% decline in Unilever’s sales in the region. Unilever with its European origin cannot afford to lose ground in its home market.

What could pose a concern in the long-term?

Merger-related overhead expenses

In an attempt to double its revenues with a decade, Unilever’s CEO, Paul Polman, has been on an acquisition spree with the recent $1.8 billion acquisitions of Sara Lee’s European detergent and shower gel business as well as the $3.7 billion all cash acquisition of Alberto Culver. It recently also sold its Sanex brand of personal care products for $954 million to Colgate-Palmolive (NYSE:CL) in exchange for Colgate’s detergent business in Colombia for $215 million.

While the merger related costs such as bankers’ commission, legal counseling expenses etc are a one-time expense, the post-merger integration costs such as incoming employee pension liabilities and labor force rationalization (severance pay costs), organizational restructuring, etc. could weigh on operating margins in the process. The widely professed synergies will take some time to up in operating margins in a few quarters, and so we are cautious on this for now.

View our detailed analysis for Unilever here.