Unilever: Sustained Growth Likely to Continue

By Ashish Sharma - July 5, 2012 | Tickers: CL, PG, UL | 0 Comments

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Unilever plc (NYSE: UL) is an Anglo-Dutch multinational consumer goods company. Its products include food, beverages, cleaning agents, and personal care products. It is the world's third-largest consumer goods company measured by 2011 revenues (after Procter & Gamble and Nestlé) and the world's largest maker of ice cream, with revenues exceeding €46 billion in FY11. Unilever has recovered well since March 2009, when its stock price reached a five year low of $17.66, and is currently trading around $34. Investors are now wondering whether this turnaround is sustainable and how likely Unilever is to continue its recent strong performance. I believe the company’s growth will continue due to the following factors.

Impressive Organic Growth and Acquisitions

Unilever has been strengthening its portfolio by expanding in international markets through various acquisitions. In the fourth quarter of 2010, Unilever acquired the personal care business of Sara Lee Corporation, adding leading brands like Radox, Duschdas, and Neutral to the company's portfolio in western Europe. Unilever acquired 82% ownership in the Russian brand Concern Kalina in December 2011. In addition, Unilever acquired Chicago-based Alberto Culver in May 2011 and is now the world’s leading company in hair conditioning; it is expected to substantially increase its market share in this sector going forward. I believe the company’s inorganic growth strategy will continue. In addition to M&A, other forms of growth continue to impress; Unilever showed organic growth of 8.4% in Q1 2012, owing to sustained increases in volume despite a 3.5% price increase.

Vast Scope for FMCG Growth in Africa

Africa presents a huge untapped market opportunity for global consumer goods companies as GDP per capita continues to grow at ~4-5% annually. Significant population growth (~2% annually) and continued urbanization in Africa are the key factors likely to enhance the FMCG consumer base by significant proportions in the coming years. Unilever's management has recognized this opportunity and is looking to double its revenue in Africa to €6 billion in 2015 by expanding its distribution network, introducing new products, and improving its cost structure to stay more competitive. This implies ~1.5% top-line growth from Africa alone.  

Multi-year Restructuring Program

Unilever is in the midst of a multi-year restructuring program centered largely on volume growth and sustainable year-on-year improvements in operating margin and cash flow. Volumes were reinvigorated in 2009 via a combination of price cuts and increased advertising & promotions.

As a result, the company has seen a volume growth of 7.5% within two years (2009 to 2011), despite increasing prices. This is better than its peers Proctor & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL); P&G reported organic growth of just 3% last quarter while Colgate reported a rate of 6.5%.

In addition to topline growth and price increases, the company is also focusing on cost reduction. Strong initiatives are being implemented to induce a performance-based culture within the organization. Rewards are now much more heavily weighted to performance. There are fixed rewards (~35-51%), but at the same time there is opportunity to earn more than before for strong performers. This will have a positive impact on efficiency and delivering time sensitive targets.

Trading at Discount versus its Peer Group

The following table compares the forward P/E of Unilever and its peers Procter and Gamble, Colgate-Palmolive Co, and Nestle.

* Forward P/E sourced from Yahoo! Finance

Unilever is trading at a 7-19% discount to its peers PG, CL, and Nestle. I believe this discount is unjustified, and the company should be trading on par or at a premium to this group given its solid fundamentals. I find the risk-reward profile for the stock attractive and would recommend buying it.  

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