In recent days I have looked at why I believe Unilever (LSE: ULVR) (NYSE: UL.US) looks set to ride higher.
But, of course, the world of investing is never a black and white business — it take a variety of views to make a market, and the actual stock price is the only indisputable factor. With this in mind I have laid out the key factors which could, in fact, seriously compromise Unilever’s investment appeal.
Refreshment remains a concern
Unilever’s Foods section has long been the laggard of the firm’s four main divisions, and sales here edged just 0.3% higher in 2013. But while the company is taking drastic steps to counter enduring weakness here — indeed, Unilever’s Ragu business in the US is rumoured to be the firm’s latest divestment candidate — weakness in the Refreshment division is also weighing on group performance.
While group income rose 4.3% last year, sales in Refreshment — which includes the likes of Lipton tea and Kibon ice cream — advanced just 1.1% during the period. And a 1.2% decline during the final quarter suggests that accelerating sales weakness may be on the cards, exacerbated by intensifying competition across many of its key brands.
Developed markets keep dragging
Unilever has made no secret of its desire to expand its exposure to emerging geographies which, despite concerns over decelerating GDP growth rates, looks set to drive growth over the long-term as consumer spending power mounts. But in the meantime, lasting sales weakness in the firm’s established markets remains a major headache.
Indeed, the business announced last month that
“developed markets remained weak [in 2013] with little sign of any overall improvement despite the more positive macro-economic indicators in recent months.”
In particular, sales in Europe drooped 1.1% last year to €13.5bn, and worryingly intensifying sales weakness in the previous-stable Northern nations offset stabilising conditions in the South. Revenues from the continent account for 27% of the group total.
Debt levels on the rise
Unilever announced last month that net debt rose by a chunky 15% last year to €8.5bn, mainly due to the €2.5bn cost of hiking its stake in India’s Hindustan Unilever from around half to just over two-thirds.
Unilever has continually hinted at its intention to ratchet up its developing region exposure through M&A action. And although the effect of asset divestments in its Food division is likely to mitigate the need for external capital, whether or not this is likely to outweigh the cost of any fresh link-ups of course remains to be seen, particularly as the company’s cash pile has dipped over the past year.