Cleaning House in Emerging Markets
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The European crisis has forced the Anglo-Dutch giant Unilever (NYSE: UL) to cut 500 jobs in Britain. It is not that the food and cosmetics giant, which operates in more than 100 countries, employing over 171,000 workers has performed below expectations in Britain, but rather the serious slowdown in economic activity in Europe along with rising costs have forced them to implement a serious restructuring program.
Per a number of reports Unilever absorbed as much as €2.4 billion of commodity inflation in fiscal 2011. While they have guided towards a modest improvement in their core operating margin for 2012, given the current worsening sales climate this looks challenging. Commodity prices have retreated in the 2nd quarter of 2012, but if central banks attempt to reflate the credit markets which are the cause of all of this economic malaise, that will ignite yet another round of commodity inflation.
Emerging Market Labor Mining
As a part of this program a large portion of their workforce will be outsourced to India to cut down on costs. Europe has forced many firms to slash costs on a scale not seen since the recession of three years ago. Like many other multinationals, Unilever is also focusing on developing regions. Unilever has increased their average workforce in their Asia-Africa business. Lower labor costs are the obvious benefit. But, since revenue from Asia-Africa has been the largest contributor to their coffers, it only makes sense for Unilever to hire locally to produce the products they are selling.
The underlying sales growth in the Asia-Africa region was 10.5% in 2011, compared to 6.3% in the Americas and just 0.8% in Western Europe. Thanks to strong performance in emerging markets in the first quarter of 2012 against a difficult consumer backdrop, organic growth hit 8.4% compared with market expectations of 6.4%. In late 2011 the company has invested about GBP90 million ($57.3 million) in Indonesia to build a new, personal care factory and to expand other facilities. This should increase Unilever's capacity for growth and service, potentially increasing demand for their products throughout parts of Asia and Africa. The Market Vectors Indonesia Index ETF (NYSEMKT: IDX) is weighted very heavily towards consumer stocks (24.5%) as opposed to financials, which is normally the case (just 26%) and 22% in basic materials.
Continuing the trend of shifting production towards Asia, Unilever has started construction in China of one of its largest production operations, where it will make liquid laundry detergent and fabric softeners. While Unilever is ranked number three worldwide in sales behind P&G (NYSE: PG) and Nestle , its Indian arm, Hindustan Unilever Limited, is the largest consumer goods company in India thanks to its first mover advantage in the region that stretches back to British control of India. In March 2012: Unilever’s CEO Paul Polman unveiled plans to build production and distribution facilities in Colombia with investment of around $75 million that will help drive sustainable growth for the company in the fast-growing South America markets.
There is absolutely no doubt that Unilever is extending its roots within Asia and other emerging markets for growth which is also paying off, but the more important point here is that it is not the only one who is expanding. It will be very interesting to see who will win the cat & mouse race in the coming years; will it be Unilever, P&G or Nestle etc. For while revenue was up 6.5% in 2011, operating margins eroded slightly to 14.9% and volume growth slowed significantly to 1.6% from 5.8%.
That said, Unilever, trading at a multiple of 17 with a solid 3.5% yield below $35 per share, is trading near fair value at $32.80 (June 18th close). The dividend looks defensible at this point and rises above 4% if the stock drops to $30 on any more turmoil in Europe, which is the October low. Accumulating this stock as a long-term hold based on the Asian growth story and defensive nature of its business in good times and bad would be warranted for those looking to build capital with good cash flow. A near 4% yield make Unilever a tempting income bet while the situation in Europe sorts itself out.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of The Procter & Gamble Company. Motley Fool newsletter services recommend The Procter & Gamble Company and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
