July 25, 2013 7:18 pm

Unilever: suds law

It pays to keep thinking long term

The competition among the global consumer goods companies plays out over years, not quarters. Judging by stock performance prices, Unilever is winning this war of attrition: over both five and 10 years, its returns are well above those of Colgate-Palmolive or Procter & Gamble.

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All the same, Unilever’s results for the first half raise worries. The company consistently delivered organic sales growth of more than 6 per cent over the past two years. That growth fell to 5 per cent in the first half of this year, it reported on Thursday. In emerging markets – Unilever’s particular strength – organic growth slipped to 10 per cent, from 11 per cent a year ago. A mild slowdown, but enough to push the stock down a few per cent.

Organic growth determines market share – which is, in turn, a proxy for all-important pricing power. Since Unilever derives more than half of its revenues from emerging markets, the slowdown there is especially important. Organic revenue growth at Colgate, which also reported results on Thursday, was ahead of Unilever’s at 6 per cent, although most of this came from a strength in the US rather than Latin America, Asia and Africa.

Softening sales are a particular concern with Unilever trading near its five-year high, on 19 times forward earnings. This is behind peers Colgate (21 times) and P&G (20 times). But the former has always traded higher for commanding higher overall margins. And the latter, with its old chief executive back at the helm, has stirred hopes of a recovery.

Unilever’s revenue performance does not tell the whole story. Margins are improving. New products and a healthier trend in raw material prices helped it to boost its gross margin by 120 basis points from a year earlier. Growth and valuations are important. But it pays to keep thinking long-term.

Email the Lex team in confidence at lex@ft.com

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Letter in response to this column:

By itself, market share leadership isn’t worth a dime / From Dr Andreas Hinterhuber

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