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Two Manufacturing Giants Set for Long-Term Growth
Posted by: Patricio Kehoe (IP Logged)
Date: October 23, 2013 04:06PM

Consumer goods manufacturing giants such as Unilever PLC (UL) and Procter & Gamble Co (PG) benefit from the global diversification of their operations. While Europe is still suffering from macroeconomic problems, emerging markets have shown strong growth rates, allowing the companies to offset weak performance at other regions. However, as developing markets grow at an accelerated pace, the elevated demand for raw materials has led to short-term constraints. Less exposure to the European market and cost-cutting initiatives in emerging markets leaves Procter & Gamble in a better position than Unilever PLC looking forward.

Uncertainties Tarnish Growth Prospects

Unilever PLC is a subsidiary of The Unilever Group, an important manufacturer of consumer goods with an international presence that sells packaged food, household goods and personal products in over 180 countries. Through its competitive advantages, the company has achieved market-leading positions in diverse categories like dressings, tea, ice cream, deodorants and mass skin care products.

Unilever PLC’s economic moat is derived from the strength of its brand portfolio and the scale of its operations. The pricing power the firm has achieved allows it to raise prices and increase sales simultaneously. At the same time, the firm is able to further reduce unit costs through its extensive global distribution platform and large negotiating leverage. This enables Unilever to establish a distinct competitive advantage over rival manufacturers.

Despite these advantages, costs are expected to remain elevated, constraining growth in emerging markets, where the firm obtains 55% of its consolidated sales. In addition, weak consumer spending in Europe, the company’s stronghold, is expected to continue, because persistent high unemployment levels and austerity measures implemented in Europe limit growth opportunities. In addition, the company is currently facing an important restructuring initiative. During this process, unforeseen challenges could arise, potentially destabilizing its operations.

Despite the firm’s attractive 3.37% annual dividend yield, Joel Greenblatt recently sold out his entire stake in the firm. This comes as somewhat of a surprise, since Unilever has a solid financial position, with healthy cash flow levels, and a comfortable operating margin of over 13.5%. However, when we take a look at the stock’s annual performance, the reason becomes more evident. Share value has not followed a steady trajectory, with growth trends followed by sudden drops in share price, depicting shareholder uncertainty.

Investors seem particularly uneasy regarding the accelerated pace at which currencies in emerging markets have weakened. However, I feel optimistic about the stock even though short term prospects are not very promising, because Unilever can achieve long term growth and offer great benefits for those willing to wait.

Cost-Cutting Initiative and Focus on Emerging Markets

Procter & Gamble is the largest player in the consumer product manufacturing business, with annual global sales exceeding the $1 billion mark. The firm operates a wide array of leading brands such as Charmin toilet paper and Pantene shampoo, among others. Unlike Unilever, Procter & Gamble decided to abandon the food industry in 2012, when it sold its last food-brand to Kellogg. The company is largely active in emerging markets, with around 40% of consolidated sales coming from these regions.

Despite the firm’s large size and vast global network, recent years have not been as profitable as expected. Some analysts believe entry into emerging markets was too sudden, leading to an under-penetration of brands. Nevertheless, this also represents an interesting opportunity for long-term growth. Procter & Gamble intends to further stimulate growth in developing markets, pulling back investments from developed regions where market maturity leaves little room for expansion.

In addition to concentrating on emerging markets, the company has implemented a $10 billion cost-saving plan in order to reduce costs. Manufacturing productivity is to increase through reductions of platforms and work force and costs cut, by localizing the sourcing of raw materials. This initiative will allow the firm to focus on enhancement of scale in regions that are growing at an accelerated rate. By doubling its presence in emerging markets such as China, Brazil, Nigeria and Indonesia, the company expects to increase revenue significantly. Procter & Gamble’s new strategy will not only drive productivity, but create additional value for customers and shareholders alike.

Procter & Gamble also has the backing of investment gurus John Hussman and Joel Greenblatt, who recently purchased shares of common stock. Despite not foreseeing an accelerated growth in sales or margin expansion in the short term, these two gurus understand the firm’s long-term possibilities. Also, the stock’s 3% annual dividend yield is yet another argument in favor of this company. Hence, I feel bullish regarding Procter & Gamble’s future.

Both Firms Bound for Long-Term Success

Both Unilever and Procter & Gamble are global players, with large portions of their sales coming from emerging markets. However, Procter & Gamble’s cost-cutting initiatives will allow the firm to offset rising prices for raw materials. These rising costs, on the other hand, represent a problem for Unilever, which has also been affected by European austerity measures. Despite differences in the short term, I feel quite bullish about both firm’s long-term prospects.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.



Guru Discussed: Joel Greenblatt: Current Portfolio, Stock Picks
Stocks Discussed: UL, PG,
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