Unilever results this morning

The company published a strong set of results on the headlines: growth was higher than expected, especially volumes (despite one extra calendar day), margins were better. Obviously, the portfolio restructuring helped.

Now the story on food companies over the last few quarters was often of weak volumes but strong pricing.

Unilever is now guiding for negative pricing, which spooked the market. Analysts are going to lower the top-line numbers that they had pencilled in their models. Just a touch now: from say 3.5% to 3%.

What would be the impact on their price targets if they lowered it to below 2%?

Also, A&P spend increased by 130bp last quarter. So it looks like they are having to promote more and more heavily. Personally, I only buy HPC products when you get a “Buy one get one free” offer. If shoppers are down trading, A&P may have to increase further in the next quarters, which is not in numbers.


What to do with the stock?

Unilever outperformed the Consumer staples since the March 09 lows. In fact, it even outperformed the overall market. Is that a key negative change for the stock that most of the consensus is missing?

Let’s look at expectations:

The consensus thinks operating income can increase 10% in 2009 vs. 2008 and a further 6% in 2010 vs. 2009.

In the meantime, sales would grow by 4% and 5% respectively.

Today’s results mean that sales growth in Q4 could be less than -2% in Q4, bringing annual sales growth to the 1-2% range. Therefore, the consensus will have to cut sales growth by at least 2%. Can Unilever continue to deliver higher margins with sluggish sales? I think not.


Unilever will then get downgrades while cyclical stocks (see Clariant yesterday) are getting upgraded. It looks like a sell to me.

On the graph, you can see how relative performance was logically gained in H2 2008, but maintained from March 2009, which was amazing for a defensive. The stock has had several warning signs though. Are those results yet another chance to exit?