Does Unilever's Beat Signal an Emerging-Markets Turnaround?

Does Unilever's Beat Signal an Emerging-Markets Turnaround?

Some time ago, Unilever delivered a warning that had investors quite worried indeed. A bellwether for emerging-markets growth, and a big one at that, the Dutch-English company stated in its second- and third-quarter reports that it saw growth in many emerging markets slowing down, with demand for consumer goods waning.

Another European consumer-goods heavyweight, Heineken , presented a similar picture. Yet Unilever's fourth-quarter and full-year 2013 report was nowhere near as bad as expected, with underlying sales growth in emerging markets putting up a solid performance. Are emerging markets on the upturn again?

Mixed messages
To put the latest numbers in perspective, let's take a look at some of Unilever's recent press releases. For the second-quarter report, CEO Paul Polman seemed fairly adamant that emerging markets growth was slowing down, apparently due to macroeconomic difficulties in many of the company's core markets. Then, before releasing its third-quarter report, the company threw off its first profit warning since 2004, saying that a slowdown in emerging markets growth would lead to underlying sales growth of between 3% and 3.5%. This compared rather poorly with the 5% delivered in the second quarter.

The buzz spread around Wall Street quickly. Due to Unilever's size, and the fact that it derives some 60% of sales from emerging markets, the company is closely watched by analysts and investors for clues as to what's going on in developing economies. As such, the news had many commentators speculating about a probable slowdown in emerging markets growth. However, the latest report is not nearly as bad as was feared.

The metric most closely watched by analysts in Unilever's reports is generally underlying sales growth, as it tries to eliminate the effect of currency fluctuations. These came in above analyst expectations, with overall underlying sales growth up a healthy 4.3% and in emerging markets specifically up 8.7% for the full year.

Encouragingly, most of the sales increase came from higher volume, meaning the company is actually selling more products. The company saw especially strong demand for its personal-hygiene segment, with things such as hair care products seeing strong demand in Brazil especially. In order to sustain this growth, the company will be investing a larger amount of money than usual in developing its emerging markets footprint. Investors were clearly relieved by the report, sending the stock up around 3.5% in U.S. trade.

Industry trends
If Unilever's picture of emerging markets is somewhat hazy for last year, the same is true for Heineken. The world's third-largest brewer is highly dependent on emerging markets for growth and is also a useful barometer for the developing world. The company's emerging-markets results were fairly poor in its most recent earnings report, with the exception of its Asian business.

Africa and the Middle East didn't perform too well, with organic revenue down 3% for the quarter. Management cited ongoing unrest in Egypt and the Democratic Republic of Congo as a drag on sales, while inflation and high unemployment slowed sales in Nigeria. Emerging Europe did even worse, with group beer volume down 7% organically due to soft spending in Russia, Romania, and Greece. Asia-Pacific continued its strong performance following the acquisition of Asia-Pacific Breweries in 2012.

Procter & Gamble, Unilever's key U.S. competitor as a highly diversified consumer-goods company, is also dependent on emerging markets for its revenue stream, together accounting for some 39% of net sales. Also comparable was its emerging-market sales growth for 2013, which was around 8% for the company's top 10 developing economies. Looking at these numbers, one would think there is little to worry about in terms of the developing world slowing down.

The bottom line
Unilever's earnings reports are always closely watched for clues as to the state of the global economy. After an initial scare before its third-quarter report, Unilever's full-year figures have turned out not too bad at all. While growth does seem to be slowing down somewhat in some emerging economies, the company is still doing excellent business around the world. As such, investors who are bullish on emerging markets growth should consider Unilever as a relatively safe play.

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