Today I am assessing Unilever’s (LSE: ULVR) (NYSE: UL.US) earnings prospects for the next 12 months.
Developing nations remain the key
The impact of slowing activity on high streets across emerging markets has led many to question Unilever’s revenues potential for this year and beyond. Indeed, like-for-like sales growth of just 5.9% during July-September represents a significant slowdown from the 10.3% increase punched during January-June. More than 56% of group sales originate from these regions, outlining the importance of strong retail markets here.
I have long argued that, although the effect of economic rebalancing in developing economies could stymie growth rates in the near term, the implications of galloping population expansion in these regions, combined with rising disposable incomes, should propel consumer spending much higher long into the future.
But for some, these demographics are likely to bolster goods demand sooner rather than later. Indeed, the Organisation for Economic Co-operation and Development (OECD) notes that in China, accelerating spending power is set to push GDP growth to 8.2% in 2014 from 7.7% this year. Beijing is stepping up the fight to deliver future growth through consumption rather than heavy investment flows, and the OECD expects this to underpin the country’s emergence as the world’s biggest economy by 2016.
City analysts expect Unilever to record a heavy dip in earnings this year, with a 19% reverse to 130.4p per share widely anticipated. But the household goods giant is predicted to bounce back modestly in 2014 with a 5% increase to 136.9p.
These projections leave the company dealing a P/E rating of 17.7 for next year, comfortably above a forward multiple of 10 times earnings which is broadly-regarded as decent value for money.
It could be argued that this valuation is far too steep given the prospect of heavy earnings losses this year, while further deterioration in key growth regions could jeopardise expectations of a slight recovery in 2014, particularly in the event of significant Federal Reserve monetary tapering.
Meanwhile, Unilever’s performance in developed markets also threatens to drag next year as the economic recovery here remains weak — indeed, the company mentioned in October’s financial update that it had “not yet seen an improvement in market conditions in North America or Europe,” with sales here declining a further 0.3% during July-September.
Still, investors should take note that, due to the strength of developing nations, underlying group sales still rose 3.2% in the third quarter, a respectable return in the current environment. But even in the event of further pressure on shoppers’ wallets, I believe that the company’s catalogue of market-leading brands — from Dove beauty and hygiene products through to Wall’s ice cream — and thus ability to lift prices without harming revenues should help defend future earnings against sustained weakness.