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Stock price: €23,2 ($30.79 US)

Conclusion: Although underlying sales were in line with expectations, Unilever's (NYSE:UL) EPS growth could be higher (+6%) mainly due to forex and below the line factors. We raise our valuation range up to €24-€25 per share. The stock remains fairly priced on our revised estimates.

Q1 results: Sales up 6.7% to €10.1bn (up 4% organic). Net profit including one-off up 32%. Guidance 2010: Volume growth, improved margin, strong cash flow.

Top line below peers, but improving.

  • 4% growth in Q1 compares with +6% for Nestle (OTCPK:NSRGY) and +7% for Danone (OTCQX:DANOY). Unilever lags behind peers despite a higher exposure to emerging markets. The gap stems from its exposure to either slow growing (spreads and savoury) or highly competitive categories (laundry), which account for half of sales. Savoury, dressings and spreads sales were flat in Q1, while home care was up only 2.5%.
  • Personal care and ice cream and tea are doing great, expanding +7-8%. Unilever is gaining share in skin, deodorants, household cleaning products.
  • Negative pricing (-3.3%) keeps affecting top line. CFO indicated that pricing will turn positive towards the end of the year rather than mid 2010, which reflects an even tougher competitive environment in emerging markets and also in Europe.

Back to EPS growth (15%+) following three consecutive years of dragging earnings.

  • We expect margin to improve by 30bp for the full year vs +60bp in Q1. The key driver, gross margin which was up 240bp in Q1, could be under pressure in H2, as result of rising raw material and packaging costs. In addition, comps will get tougher as gross margins in Q3 and Q4 last year gained 290 and 310bp respectively.
  • Management reconfirmed cost savings of around €1bn this year, implying €700m left for the next three quarters, versus €320m achieved in Q1. Consequently, the positive impact of savings should be lower for the rest of the year than in Q1.
  • Conversely, A&P expenses will increase but at a lesser rate than in Q1.

All in all we upgrade our EPS estimates from €1.40 to €1.49 in 2010 (+6.4%), mainly due to +4% positive forex impact combined with slightly lower financial expenses and lower taxes.

We welcome the return to underlying EPS growth. Nevertheless, we feel that Unilever should further adjust its product portfolio in order to focus on faster growing activities and catch up with peers. In addition, as earnings continue to be impacted by heavy recurring restructuring charges (€4bn charges through the 2006-2010 period…), adjusted EPS are not really meaningful. Unilever trades at 15.5xP/E based on adjusted EPS, but the multiple moves up to 17.2x based on “clean” non adjusted numbers, compared to 17.4x for Danone and 15.9x for Nestle. We think Nestle offers a higher return.

Source: Unilever: A Welcome Return to Growth, But Faster Growth Activities Still Lacking