Unilever Retains Economic Moat

Despite competitive pressures, and headwinds from slower growth in the emerging markets, Morningstar analysts reamin positive about Unilever's prospects

Erin Lash, CFA 21 January, 2015 | 11:58AM
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Intense competitive pressures and tepid consumer spending persist, as evidenced by Unilever’s (ULVR) results, but we contend the firm’s brand intangible asset and cost edge, which form the basis of our wide moat, remain firmly in place. While we aren’t adjusting our EUR 33 fair value estimate, we’re now incorporating spot exchange rates to value its other share classes, which drives our fair value estimate changes to £24.92, down from £26.83. This will enable us to more appropriately account for the present environment, and our fair value estimates will continue to ebb and flow with spot rate changes.

For the quarter, organic sales rose 2.1%, reflecting higher prices as volumes slipped 0.4%. Emerging markets, which make up 57% of sales, have slowed significantly from a year ago, up just 5.7% for fiscal 2014 compared with 8.7% growth in fiscal 2013. However, we believe the firm’s tenure in these regions which dates back more than 50 to 100 years in some instances and its subsequent grasp of consumer trends, combined with investments in new products and marketing will ensure Unilever is well positioned when growth resumes.

North America posted 2% underlying sales growth driven by a balanced contribution from price and volume, though we aren’t blind to the fact that this compares to a weak period last year, when sales fell 2.4%. Given management’s commentary that promotional spending in U.S. hair care and deodorants is running rampant, it will take a few more quarters before we view this uptick as sustainable.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Unilever PLC3,918.00 GBX-0.71Rating

About Author

Erin Lash, CFA  Erin Lash, CFA, is a senior stock analyst with Morningstar.

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