Unilever’s Profit Warning Indicates Slowdown Across The Consumer Products Industry

by Trefis Team
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Last week, Unilever announced that it is expecting underlying sales growth (USG) of 3%-3.5% in the third quarter of FY 2013, as against 5% achieved in the first half of the fiscal year. The company attributed the decrease primarily to the sluggish growth in emerging markets and, to some extent, flat growth in developed markets. [1]

Despite slower growth in Q3 2013, Unilever’s management is upbeat about the company’s growth in Q4 and the complete fiscal year 2013. “For 2013 we are still on course to deliver against our priorities of profitable volume growth ahead of our markets,” said CEO Paul Polman. [2] Other major players including Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL) also continue to maintain their latest guidance.

The majority of the growth for the key players in the consumer products industry presently comes from the emerging markets. Hence, Unilever’s announcement sparked concerns among investors about the prospects of the consumer products industry. Since the announcement, Unilever’s stock has lost about 5% of its value, while major players such as Procter & Gamble, Kimberly-Clark and Colgate-Palmolive have seen their stock price decline by low to mid single-digits.

In this article, we analyze the reason behind the slowdown in the emerging markets, and how it could impact key consumer staples players.

What’s Causing The Sluggish Growth In Emerging Markets?

Demand for consumer products in emerging economies such as India, Brazil, China, South Africa and Russia has been increasing year-on-year due to rising per capita disposable income. These markets are expected to continue growing, albeit at a slower pace. Most of these markets have been plagued with currency weakness lately. The situation has aggravated due to fears over the Federal Reserve’s plan to taper off quantitative easing. [1] Relaxing the quantitative easing program would reduce capital inflows into these countries, worsening their current account balance. This in turn would lead to further currency depreciation.

Year to date, the South African Rand (ZAR) has depreciated 18% relative to the EUR, while the Indian Rupee (INR) and the Brazilian Real (BRL) have depreciated by 13% and 10% respectively. [3] This rapid currency depreciation has created inflationary pressures on buyers, who have reduced their consumption. Even though China’s currency (CNY) is presently trading near the same exchange rate (relative to the EUR) as at the beginning of the year, the demand is still on a slowdown in the country due to certain regulatory changes. [4]

The Impact This Could Have On Consumer Staples Stocks?

Unilever: The contribution of emerging markets to Unilever’s total revenue currently stands at slightly over 55%. The company intends to lift this to 75% by 2020. [5] It has been shedding some of its North American food businesses in order to focus on home and personal care products. These two categories together generate about 80% of Unilever’s emerging market sales, and hence are most prone to emerging market volatility. The company’s above-market global growth in the last few years has come on its rapidly expanding presence in emerging markets. It achieves about 85% of its overall growth from these markets. [5] Therefore, Unilever’s growth could slow significantly should the emerging market slowdown continue.

Our price estimate of $40 for Unilever marks our valuation at a premium of about 5% to the current market price.

Procter & Gamble: P&G’s products are usually priced at higher price points due to their premium quality. Therefore, its products witness higher demand in the developed economies than the emerging ones. The company derives less than 40% of its revenues from emerging markets. However, it is now looking to enhance its presence in these markets as they continue to grow at much faster rates than developed economies. The company registered organic sales growth of 8% in its top 10 developing markets last year. [6] We believe that a prolonged slowdown could hamper P&G’s expansion plans, and consequently its growth trajectory.

Our price estimate of $74 for Procter & Gamble is almost in line with the current market price.

Colgate-Palmolive: Colgate-Palmolive derives more than half of its revenues from emerging markets. The company’s product portfolio in these countries is skewed towards oral care products, which generate slightly less than 50% of total company sales. Colgate-Palmolive is the oral care market leader in many of the emerging markets including, India and Brazil. [7] Emerging market growth is a strategic priority for the company and may not yield expected results due to the slowdown. [8]


Our price estimate of $56 for Colgate-Palmolive is almost in line with the current market price.

Kimberly-Clark: Kimberly-Clark operates primarily in North America and Europe. Slowing growth and profits in these regions are pushing the company to hunt for international opportunities. Kimberly-Clark is currently pursuing strong expansion in Latin America. This is the primary factor driving sales growth for the company across segments. Kimberly-Clark is also going through a major restructuring operation, which involves exiting the diaper business in Europe and channelizing resources towards better growth opportunities such as the diaper market in China. [9] We think that Kimberly-Clark may go light on its expansion plans if the slowdown continues, thereby lowering sales growth.

Our price estimate of $101 for Kimberly-Clark is at a premium of over 5% to the current market price.

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Notes:
  1. Unilever sales hit by emerging markets slowdown, NDTV Profit, October 1, 2013 [] []
  2. Unilever on track to meet its 2013 priorities despite slower market growth in many emerging countries, Unilever Website, September 30, 2013 []
  3. www.oanda.com []
  4. China’s economy on ‘smooth’ slowdown: Xi, The Sydney Morning Herald, October 8, 2013 []
  5. Emerging markets to generate 75% of Unilever sales by 2020, Live Mint, November 22, 2012 [] []
  6. Will an Emerging Market Slowdown Crush Consumer Staples Stocks?, The Motley Fool, October 5, 2013 []
  7. Colgate-Palmolive Q2 2013 Earnings Call, Seeking Alpha, July 25, 2013 []
  8. Will an Emerging Market Slowdown Crush Consumer Staples Stocks?, The Motley Fool, October 5, 2013 []
  9. Kimberly-Clark Announces Second Quarter 2013 Results, Kimberly-Clark Investor Relations, July 22, 2013 []
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