Five years ago, emerging markets were a source of growth for companies right around the world, including Unilever (LSE: ULVR) (NYSE: UL.US). Indeed, Unilever still derives around 60% of its revenue from these markets.
Right now, though, growth rates in emerging economies are slowing. So what if this growth slows further? What does it mean for Unilever?
Not a pretty picture
According to The World Bank, Indias growth rate in 2010 was 10.3%, but now its around 5%. Chinas GDP growth rate in 2010 was 10.4%, while today it stands around 7.5%. Finally, Brazil was buzzing along at 7.5% GDP growth in 2010 now its struggling for 2.5% growth. Even Russia was growing at 4.5% in 2010, with forecasts now it will slide into recession next year.
Cmon though these are pretty broad numbers, surely they dont relate directly to Unilever? Well, you might be surprised.
In 2013 the household goods maker was still recording double-digit growth in its three biggest markets in the region, but it all went a bit sour this year. In fact 2014 saw the slowest third-quarter revenue growth in five years for the company. Underlying sales rose just 2% in the three months to September.
Its not just emerging markets though that are causing headaches for executives. According to analysts at ING, revenue in Europe fell 4.3% in the three months to September.
Upside hope
If the CEO, Paul Polman, is worried about Unilvers current performance, hes not showing it. He sees improved growth in 2015. His logic is that emerging markets are still driving world growth and that they are set to post healthy growth next year. Just to confirm his thinking, hes gone on the record to say that the global economy has indeed bottomed out so growth can only improve from here. Specifically, he points to the International Monetary Funds growth projections for next year. The IMF says the global economy will grow at 3.8% in 2015. Thats up from this years expansion of 3.3%.
Moreover, one country I havent mentioned yet but that has been flagged by Unilever as a potentially lucrative source of income is Indonesia. Interestingly, its GDP growth rate has hardly budged over the past few years still motoring along at a very healthy 5.8%. Unilevers now pushing Magnum ice-cream bars of all things in the country. It signalled to the market last year that it was looking for cheaper, lower-cost products to increase its appeal to a wider demographic of customers and this is what it came up with.
So where to from here?
So there you have it. The CEO says he thinks the economies of China, India and Brazil can only improve from here. In addition, countries like Indonesia are actually primed to provide solid growth for the company.
If the CEOs claims are true, Unilever could be a solid investment next year. If emerging markets slow further, however, Unilevers sales which have already slowed significantly will deteriorate further.
City analysts, on the other hand, by and large, havent made up their minds on this one. The clear majority of number-crunchers are sitting on the fence having placed a hold recommendation on the stock.
Investment bankMacquariehas gone on the record saying that the more China does on the structural side the better. Thats code for the country isnt out of the woods yet in terms of its growth prospects.
Unilever shareholders have enjoyed some wonderful capital gains recently. The dividend yield, too, for longer-term investors, is also very sound. With earnings per share growth of 8%, Unilever could be a star performer in 2015 if the global economy bounces back with even a little bit of gusto. If it goes the other way, investors will be disappointed. Where do you think the truth lies?
One of the obvious questions that comes to mind when you wrestle with Unilever’s investment credentials is, why does it put all its eggs in one basket? Yes emerging markets have been lucrative, but that growth won’t last forever. The same goes for your own wealth management — smart diversification is the key.
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David Taylor has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
