Unilever Q4 Earnings Preview: Repeat of Q3’s Blockbuster Performance Unlikely
Unilever (NYSE:UL) is scheduled to report its fourth quarter earnings on January 19th. [1] The company is unlikely to have repeated the blockbuster performance of the third quarter, when one-off factors boosted results. However, adverse trends like deflationary conditions in Europe and commodity cost inflation in emerging markets continued in the fourth quarter, which could have had a substantial negative impact on the company’s performance.
Additionally, growth in major emerging markets like India and Latin America has slowed in recent quarters, which could pile on further pressure on the company. Lastly, Unilever has been pursuing an aggressive pricing policy to battle input cost inflation in the emerging markets. This has led to a slump in volume growth in recent quarters and the trend likely continued in Q4. Underlying (non-GAAP) sales growth for the company is guided to be at the upper end of 2% to 4% range in for the full year. [2]
Our price estimate of $46 for Unilever is about 10% higher than its current market price.
See our complete analysis for Unilever here
Price Hikes Likely Drove Revenue Growth
Unilever heavily relies on the steady growth of emerging markets to drive its own top-line growth. With GDP and consumption growth slowing down in most major emerging markets, Unilever’s top-line growth has slowed to low single-digits in recent quarters (excluding the impact of one-off factors). However, the slow growth has been accompanied by heavy commodity cost inflation in a number of markets, chief among them being Latin America.
Unilever cannot counter cost inflation without resorting to price hikes, but too much reliance on hiking prices eats into volume growth. Nevertheless, Unilever has adopted the policy of disregarding volume expansion in favor of protecting its bottom line by raising prices. Consequently, volumes are expected to have declined year on year in Latin America in the fourth quarter. However, the impact thereof is expected to be largely offset by the softer growth comparison in China due to the destocking last year. [2]
Roadmap for 2016 Expected
Unilever is likely to provide a roadmap for fiscal 2016 in the fourth quarter earnings call. (Read: What Does 2016 Hold in Store for Unilever?) The company, which is in the process of solidifying its position in the premium personal care market, has made a few acquisitions throughout the latter half of 2015. However, acquisition activity slowed in the fourth quarter with only one acquisition announced right at the beginning of the quarter. (Read: Here’s How Unilever Could Benefit From Acquiring Grom) Unilever may provide a state of the union on where it currently stands in its acquisition strategy and whether the purchases are expected to continue in 2016.
Unilever has also stated that it plans to continue disposing underperforming non-core brands, especially in the Foods division. However, it did not announce any disposals in fiscal 2015, so an updated strategy for the division may be clarified in the fourth quarter earnings call.
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More Trefis Research
- Unilever Investor Relations [↩]
- Unilever Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, October 15, 2015 [↩] [↩]