Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at Unilever (LSE: ULVR) (NYSE: UL.US) to ascertain if it can make £5bn in profit.
Have we been here before?
A great place to start assessing whether or not Unilever can make £5bn in profit is to look at the company’s historic performance. Unfortunately, Unilever has never been able to make £5bn in profit but it would appear that the company is well positioned to do so.
Indeed, for the full-year 2013 Unilever’s net profit was £4bn and as a consumer goods company, the firms profit is only likely to grind higher over the next few years.
But what about the future?
Over the past five years, despite the global economic environment, Unilever’s net profit has expanded at a rate of 9.5% per year. This growth has been due to the company’s defensive product offering and expansion into emerging markets coupled with managements objective to drive profit margins higher. In particular, during the past five years, Unilever’s net profit margin has expanded from 8.5% to 10%.
What’s more, it would appear that this growth is set to continue as Unilever’s management pursues opportunities for growth.
For example, the company recently acquired a stake in Chinese group, Qinyuan, a water purification business. In addition, Unilever has been divesting non-essential parts of its business, specifically, low-margin food products, as part of a shift towards more profitable personal care brands.
Further, Unilever upped its stake in Hindustan Unilever Limited last year to 67%, from 53% to benefit from the rising demand for consumer goods products within India — a huge market for any consumer goods company.
Having said all of that, Unilever is facing headwinds within Europe where the economic situation continues to weigh on customers desire to spend. Nevertheless, the company did report that sales within Europe ticked up slightly during the fourth quarter of last year.
Still, with around half of Unilever’s sales coming from emerging markets such as Turkey, Russia and China, it is likely that the company will be affected to some extent by the current emerging markets crisis. It is likely that this will be short-term.
Foolish summary
All in all, Unilever is an extremely defensive company and management are working hard to drive sales within emerging markets and expand profit margins.
After taking these factors into account, overall I feel that Unilever can make £5bn profit.