Unilever (UN) Q1 Sales Grow On Positive Pricing, Acquisitions

Unilever (LON:ULVR) N.V. (NYSE:UN) posted improved results for the first quarter of 2017. The company’s sales increased 6.1% on the back of favorable currency impact of 2.4% and acquisition impact of 0.7%. Organic sales also increased 2.9% on a constant currency basis, in spite of a strong comparable last year that had an extra day due to leap year. Organic sales growth was better than the preceding quarter’s growth of 2.2%, as higher pricing of 3.0% offset volume decline of 0.1%. Excluding the spreads business which has been announced to exit, organic sales growth was 3.4% with volumes up 0.3%.

Organic sales in emerging markets grew 6.1%, up from 4.6% and 5.6% growth in fourth and third quarters of 2016, respectively. We note that emerging markets account for about two-thirds of the company’s total revenue. Though they are generally volatile, they offer long-term growth prospects. Sales in the emerging markets grew owing to both strong volume and pricing growth. Though Brazil continued to be adversely impacted by the economic crisis, sales in India improved as it recovered from the removal of INR 500 and 1,000 notes from circulation.

However, organic sales from developed markets declined 1.5%, wider than a1.2% decline in the preceding quarter, due to a fall in both pricing and volumes. Both Europe and North America markets declined in the quarter.

The company witnessed sales growth as well as improved pricing in all the categories of Personal Care, Refreshment, Home Care and Foods. Except Foods, volumes improved in the other three categories. Foods volume declined 2.1% in the quarter, and excluding spreads business, foods segment declined 1%.

Stock Price Movement

A glimpse of Unilever’s stock performance shows that its shares have been rallying since the past three months. Shares rallied 21.7% over the past three months, outperforming the Zacks categorized Soap & Cleaning Materials industry’s gain of 8.7%. Notably, the industry is part of the top 5% of the Zacks Classified industries (12 out of the 265). The broader Consumer Staples sector is placed at the bottom 31% of the Zacks Classified sectors (11 out of 16).

Growth Drivers

The company has been trending higher on the back of its recent strategic business review, aiming to deliver profits and boost shareholder value amid sluggish growth and increasing competition in the global packaged goods industry. The strategic review was done to gain investor support following the unsolicited $143 billion takeover offer by Kraft Heinz Co. (NASDAQ:KHC) in Feb 2017.

Consequently, the consumer products giant decided to sell its spreads business, including brands like Flora and Stork butter, which has been witnessing a slowdown for the past few quarters. Unilever also stated that it is integrating its food and refreshment businesses into a Netherlands-based unit. Since the company is listed both in Amsterdam and London, it is looking to simplify its corporate structure to ease the process of buying or disposing of businesses. Even though the changes will result in some job cuts in senior and middle management, it will bring savings from its procurement and marketing operations. Among other changes, Unilever plans to reduce the number of its commissioned advertisements by 30%.

Furthermore, the maker of Dove products and Ben & Jerry raised its cost-savings target to 6 billion euros from 4 billion euros and hiked dividend by 12%. It will also launch a share buyback plan of 5 billion euros ($5.3 billion) this year, as announced on Apr 6. Moreover, it has set a target for net debt of two times EBITDA, which would mean enough flexibility for acquisitions or returning cash to shareholders.

Unilever has also undertaken a program called Connected 4 Growth to reduce costs, under which individual expenses are reviewed during each accounting period rather than rolled over. Meanwhile, the company continues to struggle with declining volumes in Brazil and a soft economy in Russia. Further, it is witnessing softness in the developed markets in North America or Europe with little sign of recovery. Nevertheless, the company is consistently focusing on product improvement through innovation. Moreover, Unilever has entered into many deals to fortify its position in home care and personal care products. These acquisitions will strengthen its portfolio and generate substantial revenues.

Recently, the consumer products giant is planning to buy New York-based Sir Kensington’s, an upstart food company that makes natural and non-GMO ketchup and eggless mayo. The deal, priced at about $140 million, is expected to boost the company’s portfolio and position it better in the condiments market.

Unilever currently sports a Zacks Rank #1 (Strong Buy) and we believe there is still much value left in the stock, which is quite evident from its VGM Score of ‘B’.

Key Stock Picks

Other top ranked consumer staple companies include Pinnacle Foods, Inc. (NYSE:PF) and Treehouse Foods, Inc. (NYSE:THS) .

While Treehouse has an average positive earnings surprise of 4.12% in the trailing four quarters and a long-term earnings growth rate of 15.24%, Pinnacle Foods has long-term earnings growth rate of 8.25%. Both the stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

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