Today I am outlining why I believe Unilever (LSE: ULVR) (NYSE: UL.US) should continue to head higher on the back of strong emerging markets.
Emerging markets to remain a lucrative revenues driver
Shares in Unilever have moved broadly to the downside in recent months, thundering almost 14% lower over the past three months as fears over demand from developing markets have dented appetite for the cyclical stock. But in my opinion, recent weakness provides a fresh opportunity to plough into the stock, as Unilever is still expected to punch meaty sales growth of 8% this year, a figure broadly in line with its historical average.
The household goods giant exacerbated patchy investor sentiment by warning of falling demand in critical developing regions in its latest trading update in September. Unilever warned that it has seen “weakening in the market growth of many emerging countries in quarter three and now expects underlying sales growth of 3 to 3.5% in the quarter“. By comparison, the business posted like-for-like sales growth of 5% in the second quarter of 2013.
Unilever added that the “ emerging market slow-down has accelerated as a result of significant currency weakening“, while performance in developed markets continues to struggle and remains “flat to down“, Unilever said. With emerging nations markets now accounting for close to 60% of group sales, strength here is essential while consumer spending in the West continues to struggle.
Despite the recent slowdown in these rich new geographies, I believe that the long-term growth prospects for Unilever from these regions remain bubbly, supported by the effect of rising income levels and credit availability on consumer spending power.
Indeed, Unilever said last month that it expects performance to pick up again during the final quarter, and pointed out that despite recent weakness, that it continues to outperform the wider market in these areas. I believe that the company’s conveyor belt of new product innovations and launches should help to defend revenues during the current slowdown, while its proven ability to build margins will also protect against mounting earnings pressure.
And broker Investec points out that although underlying sales growth in emerging markets may be the worst since 2000, when Unilever saw revenues rise just 4%, that sales this year should come in at a still-sizeable 8%. This is just off the long-term average of 9%.