We maintained our Neutral recommendation on Unilever Plc. (UL), as the company continues to face the global macroeconomic headwinds and remains exposed to unfavorable foreign currency translations due to its considerable international presence.
Unilever commands a wide portfolio of globally recognized flagship brands, such as Axe/Lynx, Lipton, Knorr, Dove, Lux, Rexona and Sunsilk, catering to a fast growing consumer goods sector. This helps the business segments to maintain a dominant share in the market and the company recorded decent growth in the first half of 2012.
Moreover, Unilever has also been expanding in the emerging markets of Brazil, India, Indonesia, Turkey, South Africa, China, Mexico and Russia. The management is taking advantage of the increasing population and growing per capita income of the emerging markets and putting greater thrust on expanding in these markets.
Unilever reported a healthy underlying sales growth of 5.8% in the second quarter 2012 on the back of volume growth, product innovation and brand building.
The company recently completed the sale of its North American frozen food operations to ConAgra Foods, Inc., (CAG). The sale of the North American Frozen food operations is in line with the company’s strategy to exit the frozen food market. The company has already divested its European frozen foods business. Unilever is reducing its presence in the developed markets, which have become saturated and are experiencing sluggish growth.
However, Unilever is facing high commodity and raw material cost that is crippling its margins. As the company sources two-thirds of its raw materials from agricultural commodities, which in turn are heavily dependent on factors, such as weather, farming practices, global demand as well as government programs and policies. Severe drought conditions in the U.S. shot up the prices of soybean, corn and wheat. Unilever continues to expect the commodity prices to rise in 2012.
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.
Currently, Unilever holds a Zacks #4 Rank, implying a short-term Sell rating.
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