We recently downgraded our recommendation on
Unilever N V
) to Underperform from Neutral due to soft consumer spending
pattern and continued slowdown in the spreads business, which
shows no signs of recovery in the near-term.
Why the Downgrade?
Unilever's earnings in the second quarter of 2013 increased 7%
owing to organic sales growth and operating margin improvement.
However, weak currencies adversely affected growth in the
emerging markets. Developed markets have also remained sluggish
due to macroeconomic headwinds.
Consumer spending in the emerging and developed markets has
slowed down due to high unemployment and low payroll tax relief.
In Europe, consumer sentiment continues to be affected by the
debt crisis with no sign of improvement. Moreover, Unilever's
performance in Brazil, Russia, India and China has also slowed
down of late. Several currencies have weakened at an accelerated
pace. With a strong presence in emerging markets, Unilever also
faces increased competition from both multinationals and strong
local players as both seek to capitalize on the growth
Unfavorable currencies have also led to a rise in commodity
costs in the reported quarter. Unilever sources a wide variety of
raw and packaging materials from international markets, which in
turn affects prices in local markets. Continuous rise in
commodity prices and weak consumer demand might hinder Unilever's
volume growth and margins, going ahead.
A slowdown in its spreads business since the last few quarters
is also hurting profitability. The company is constantly working
on its price and quality and trying to retain the natural flavors
in its spreads. It has also launched new variants of spreads in
many markets, which are doing well. However, these initiatives
have not helped the spreads business as expected as it is still
yielding negative returns.
Changing consumer preferences also keep the company on its
toes. Given the challenges ahead for Unilever, we remain bearish
on the stock. Unilever holds a Zacks Rank #5 (Strong Sell).
Other Stocks to Consider
However, not all stocks in the consumer staples sector are
performing as poorly as Unilever. Stocks worth considering in the
Pilgrims Pride Corporation
Dole Food Co. Inc.
Tyson Foods Inc.
). While Pilgrims Pride has a Zacks Rank #1 (Strong Buy), Tyson
Foods and Dole Foods hold a Zacks Rank #2 (Buy).
DOLE FOOD CO (DOLE): Free Stock Analysis
PILGRIMS PRIDE (PPC): Free Stock Analysis
TYSON FOODS A (TSN): Free Stock Analysis
UNILEVER N V (UN): Free Stock Analysis Report
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