Trouble is brewing in the Western economies again.
The U.S.economy is growing slowly at best, while the European
economy is still contracting. European consumer confidence is
still very low, and housing markets are worrisome. The average
European is cutting back on their expenditure and is rathersaving
money than spending it.
This means that companies relying on these markets for much or
all of theirrevenue can do little more than cut costs and
protectmarket share .
If you're a large company that wants to grow even larger, you
need to be present in theemerging markets . The so-called BRIC
countries (Brazil, Russia, India and China) and many other
developing economies are growing at a fast clip. They have young,
dynamic populations that are working hard and growing wealthier
But rather than risk your money byinvesting directly in these
volatile economies, why nothedge yourself with exposure to
developed and emerging-market economies using oneinvestment ?
This is one reason I like Anglo-Dutch food and personal-care
Founded in 1930, Unilever is the world's third-largest
consumer goods company (after
Procter & Gamble (
) and the world's largest maker of ice cream. Unilever has nearly
400 brands in its portfolio of foods, beverages and personal care
products. It owns several billion-dollar brands, including Ben
& Jerry's, Dove, Lipton and Wish-Bone.
When it comes to taking advantage of both the stability of
developed markets and the growth potential of emerging markets,
Unilever's management is fully aware of the opportunity.
Sales in developed markets have grown marginally in recent
years, withprofit margins stabilizing above 14%. In contrast,
sales in emerging markets surged 11.4%. Sales in emerging markets
already count for 56% of Unilever's total sales, and at the
current growth rate, Unileverwill be lessdependent on the
stalling developed markets.
Sales in Asia, the Middle East, Turkey, Africa, Russia and
Ukraine have surged by almost 10% a year since 2003 to an annual
total of $37 billion. Unilever is expanding its 52% stake in
Hindustan Unilever (its India-based operations) to 75%
tocapitalize on India's fast-growing middle class.Analysts expect
Unilever to grow another 6% to 10% this year due to its strong
presence in the emerging markets.
Even better, while most investors might be tempted to go with
astock like Procter & Gamble as a play on this thesis, I
think Unilever is a better opportunity for investors.
For starters, it isn't as well known to U.S. investors as
Procter & Gamble. Thatputs it under the radar -- exactly
where I like myinvestments . I find that the less well-known an
investment is, the better my chances of making
market-beatinggains before the crowd catches on (provided the
idea is good and the company executes, of course).
||Unilever has nearly 400 brands in its portfolio of
foods, beverages and personal care products. It owns
several billion-dollar brands, including Lipton.
In comparison, the case is clearly in Unilever's favor.
Procter & Gamble's sales grew only 3% last year while
Unilever's growth was 10.6%, thanks to its strong presence in the
emerging markets. Another reason for preferring Unilever over
Procter & Gamble is Unilever's ratio ofnet debt toEBITDA
(earnings before interest,taxes ,depreciation andamortization )
is only 1.1, which means there is enough room forcapital
investments and share buybacks.
Also in Unilever's favor is the aggressive growth path that
management has introduced. The target is to double sales and
increase its social impact while reducing the environmental
footprint. Unilever has been chosen as sector leader in the Dow
Jones SustainabilityIndex for the 14th consecutive year.
Unilever's price-to-earnings (P/E ) ratio has is nearly 20
(compared with P&G's 18.4), but its strong growth prospects
fully justify this.
Most of Unilever's solid brands have hardly been hit during
the financial crisis. Only sales in Europe declined, but that has
been more than compensated by the stormy growth in emerging
One very importantfactor for Unilever is the cost of raw
materials. Palm oil, coffee and sugar are ingredients used in
many of its products. Last year, Unilever had to take a one-time
charge-off of $2 billion because of higher-than-expected
This year, commodity prices have been declining. Most
commodities peaked in the summer of 2011 and are still sliding,
albeit slowly. Sanford Bernstein analysts estimate that
Unilever's coreoperating profit could rise 30basis points to 14%.
But the price of sugar is coming down, and that is good news for
Unilever. Of course, like all food companies, Unilever is
continuouslyhedging the swings in raw materials, but the trend is
down, which should benefit its margins.
Unilever is not a stock you should buy for a quick scalp. It
is a defensive investment that provides its shareholders with a
nicedividend each year. Unilever'sdividend yield is currently
3.4%, but it has grown by 30% since 2009.
Risk to Consider:
Rising commodity prices could hurt Unilever'sprofit . Slight
price increases could easily be passed on to consumers but bigger
movements could be costly.
Action to take -->
Unilever is growing fast in the emerging markets, and commodity
costs are declining. This makes Unilever a greatdefensive stock
to add to your portfolio.
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