Unilever needs a soft global landing

Summary

Unilever’s sales grew at a solid though lower than expected pace as global economic pressures began to bite

Argentina trims volumes

Unilever’s active global exposure means it can scarcely evade the impact of geopolitical and economic flare-ups. This time, Argentina’s debt woes took an unexpectedly large chunk out of group volumes. The result was a 50 basis-point short fall in third-quarter (Q3) underlying sales relative to expectations of a 4.3% rise on the year. Aside from solid, albeit weaker than forecast sales, the consumer institution barely put a step wrong in the quarter, again, leaving out the abandoned consolidation plan. Steady progress enables Unilever to retain its 3%-to-5% underlying sales growth range for the year – signalling that the lower end of the range is more likely – and CEO Paul Polman continues to see the group as on track for longer term goals too. Even so, investor unease remains.

Headwinds rise

Despite adding 21% between the end of the spring stock market washout in late March and a top towards the end of August, Unilever shares have floundered since. They’re now trading slightly lower for the year. Vindication of its decision to reject Kraft’s $143bn bid last year still holds. The group’s market value surpassed the likely total value of the U.S. company’s offer by as much as $25bn in September and was still well over $10bn above at Wednesday’s close. In time, a return to more stable global economic conditions would imply a Unilever value even higher than this year’s peak given that its operating margins are pulling away from rivals. The Anglo-Dutch group has tacked on some 200 basis points over two years. Returns on investments are also tracking on the topside of peer averages as Unilever pushes ahead with a long-tail strategy of making numerous but relatively small acquisitions. But global headwinds appear more pressing to investors right now. Volume declines look set to become a long-term, if not permanent norm in Argentina, whilst currency impact, which shaved 5.2% off turnover in Q3 will hit 2018 sales by 7% and earnings “a little more”. Commodity costs—another link to unmooring emerging economies—have also now been flagged as stronger headwind.

Soft landing preferable

The chief concern is that after a period of relative stability in its main territories, offering Unilever a window to right-size and clinch efficiencies, rising cloud cover over economic growth could begin to erode margin progress. Advances since 2016 still leave Unilever around average in Europe for a multi-line consumer goods maker of its size. Its operating margin over the last twelve months is 15.5% according to Refinitiv data. Reckitt Benckiser leads at 23.3%. Unilever’s edge for investors is historical dividend leadership that has essentially seen a roughly 8% compounded growth rate since 1952. To keep that edge, and pace inflation expectations that have lifted 10-year Treasury yields closer to Unilever’s 3.8%, an orderly moderation in global growth would be preferable. Unfortunately, it’s a less predictable, more volatile one that could be approaching, looking at developments this year. Unilever’s stock could keep drifting lower despite solid operating progress.