In a recent interview, Unilever’s CEO Paul Polman admitted that his company had grown “too little” over the past 10 to 15 years, but said he expects it to catch up with rivals such as Procter Gamble (PG) within the next four or five years.
We value Unilever (UL) stock with a $35 Trefis price estimate — roughly a 10% premium over its current market price — and discuss below why stock analysis firm Trefis believes Polman’s goals may be a little too ambitious.
What catching up with PG requires
Unilever closed 2010 with over $58 billion in sales while PG’s revenues were a little under $80 billion. Even with a conservative growth rate of 4%, PG’s revenues by 2015 can be expected to be over $97 billion. So “catching up with PG” by 2015 translates into Unilever growing at almost 11% year-on-year over the next five years.
Why this seems too optimistic for now:
Out of line with past performance
Unilever grew from near $48 billion in 2005 at a compounded annual growth rate of 4%. The recently published earnings guidance for the first quarter of the current fiscal year wasn’t very promising either.
While sales grew by just over 4% in Q1 2011 compared to the same period last year, the underlying volumes grew by only 2.5% with price increases contributing the remaining 1.8%. (See Unilever’s Results Show Challenges to Growth.) This sluggish volume growth would need to pick up considerably to meet the CEO’s stated goals.
Inorganic growth potential limited
Unilever has been on an acquisition spree lately with the recent acquisition of Alberto Culver (See Unilever’s Alberto Culver Acquisition Adds Shine to Stock) and Sara Lee’s European laundry and personal care portfolio (See Unilever’s European Expansion Lifts Stock).
While acquisitions could help Unilever realize its other goal of doubling sales within the decade, inorganic growth would hit a ceiling at some point on account of potential antitrust issues and would necessitate selling off a part of Unilever’s portfolio.
As required on antitrust grounds, Unilever recently sold off Sanex brand of personal care products to Colgate-Palmolive for $954 million for EU’s clearance of the $1.82 billion purchase of Sara Lee’s personal care business. See Unilever Sells Sanex to Colgate to Shed Weight Post Sara Lee Deal. In addition, Unilever will have to sell off its Alberto VO5 brand in the U.S. and its own Rave hair care products brand to fully wrap up the $3.7 billion purchase of Alberto Culver.
Increasing competition in the emerging markets with high growth prospects
Unilever aims to generate 70% of its sales from emerging markets like India and China. While this is an admirable goal, successful growth pushes into emerging markets are difficult to achieve — and often not very profitable.
In its attempt to acquire a billion additional consumers by 2015, PG too has assumed an aggressive stance in the two most populous nations – China and India. See What PG Could Look Like in 5 Years, India is Key to PG’s Additional Billion Consumer Goal. Stiff competition in emerging markets can dampen Unilever’s growth prospects and might even warrant heavy investments in low-cost manufacturing along with higher advertising and promotional spending. So while volumes might come, Unilever will have to settle with lower margins.
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