On Feb 27, we revert back to a Neutral rating on fast moving consumer goods giant Unilever Plc (UL) from Outperform due to sluggish spread sales volume and persistent macroeconomic headwinds despite reporting healthy fourth quarter results.
Why Back to Neutral?
Estimates for Unilever have been declining ever since it reported its fourth quarter results on Jan 23. Despite the impressive results in the fourth quarter, estimates have declined due to a decline in the spread sales volume and an uncertain macro-economic environment, going forward.
The company has delivered weak sales in its spreads business from last few quarters. The company has also recently closed its spreads manufacturing plant in Atlanta, due to sluggish spreads business.
In addition, the macro-economic environment of developed nations has saturated and is experiencing sluggish growth. Unilever is thus reducing its presence in the developed markets, as these markets are generating disappointing volumes.
Moreover, debt crisis in Europe and ongoing economic challenges along with austerity measures taken by the European government can badly impact the company’s European supply chain and the operations of the company.
The company also faces significant commodity cost headwinds that is crippling its margins since last many quarters. The company’s exposure to international markets also invites unfavorable foreign currency translations, which remain a significant overhang.
Following the release of fourth quarter results, the Zacks Consensus Estimate for 2013 has gone down 2.5% to $2.31 per share. The Zacks Consensus Estimate for 2014 has also declined 3.9% to $2.47 per share. With the Zacks Consensus Estimates for both 2013 and 2014 going down, the company now has a Zacks Rank #4 (Sell).
Stocks That Warrant a Look
While we prefer to avoid Unilever until we see signs of improvement in the company's performance, other consumer staples stocks worth a look are Green Mountain Coffee Roasters, Inc (GMCR), Tyson Foods Inc (TSN) and Hillshire Brands Co. (HSH), each of which carry a Zacks Rank #1 (Strong Buy).
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