Unilever: Likely Outperformer in Near Future

Unilever (UN), the food and detergent giant, has published very strong results, reporting a 33% increase in profits from last year. The company was able to increase its margins without significant cuts in advertising and promotions. Volume acceleration was reduced by price decreases and effective promotions. The company has also effectively cut the production costs to finance the surge in advertising and promotions.

By all accounts, after years of indecisive leadership, the company is now benefiting from effective leadership under Paul Polman. The two figures that are most telling are the Sales Growth and EPS growth estimates of 7.81 and 12.67, which simply confirm the fact that the company is going to outperform its peers. While the Unilever results are not as glamorous as Nestle’s (NSRGY), they are certainly less understood. Based on Bloomberg consensus estimates, the analysts are less keen on Unilever than they are on Nestle or P&G (PG).

In my opinion, this is ironically good news for the Unilever stock: Since as the company positively surprises the analysts, the stock performance is likely to be stronger. However, one thing that Unilever can learn from Nestle is innovation: Nestle, whose organic revenue increased 6.5%, greatly benefited from the sale of Nespresso coffee capsules. Nestle’s product differentiation, such as limited-edition Nespresso blend and cognac flavoured Movenpick ice cream, have attracted demand from premium consumers.

One company which must be regretting not having kept Paul Polman is P&G. The company under Robert McDonald does not seem to be heading to the right direction. To me, it seems like the company has done everything to outdeliver the bottom line as demonstrated by Core FQ3 EPS of $0.89 versus the expectations of $0.82. The producer of Tide detergents also reported better than expected gross and operating margins.

However, what is worrying me is the organic topline, which grew 4% as opposed to the 5% estimate. This disappointing figure hint a very negative dynamic in P&G’s business. P&G aggressively sought to gain volume share by cutting existing prices and introducing mid-tier and low-tier products.

While this strategy could save the approaching quarters, it is not going to be sustainable in the mid-term. This is because P&G products are more prone to private label threats than the products of food companies like Unilever and Nestle. This is simply a matter of price sensitivity. Moreover, P&G’s Beauty Care Sales are suffering. As a matter of fact, that the sales for this business unit came in 200 bps lower than expected.

Beauty Care growth was instrumental in P&G's success in the mid-2000s. However, recently the Beauty Care strategy seems to be unwinding. Moreover, the company’s biggest traditional weapon, advertising, needs a shake-up in terms of efficiency. The company would be better advised to shift resources away from TV advertising to shopper marketing.

Company Name	P/E	Sales Growth	Price/CashFlow	EPS Growth Estimate	Analysis Consensus Estimates (Last two Months)
Procter& Gamble PG	15.64	4.27	11.55	4.85	4.176
Nestle NSRGY.PK	15.77	1.17	12.68	12.29	4.344
Unilever UN	14.96	7.81	12.37	12.67	3.516
Colgate Palmolive CL	14.45	5.43	14.45	9.06	3.625
Reckitt Benkiser RBGPF.PK	14.88	5.88	14.88	2.29	3.808

Disclosure: Author long UN and NSRGY.PK