Why Unilever plc’s Divestment Programme Bodes Well For Earnings Growth

Today I am looking at why I believe Unilever‘s (LSE: ULVR) (NYSE: UL.US) streamlining plans are set to deliver a more efficient, earnings-creating machine.

Divestments keep on rolling

With sales growth in emerging markets braking sharply in recent months, and retail conditions in the West remaining challenging at best, Unilever is on a mission to strip out underperforming units as part of a wider cost-cutting programme.

Indeed, a flurry of disposals last year saw group net capital expenditure slipped more than 5% to just over £2bn. In particular, the company has taken the scalpel to its problematic Food division, and most notably sold off its Wish-Bone and Western dressing labels and Skippy peanut butter brand during 2013.

Unilever has continued clocking up the sales since then, and in recent days announced that it had sold off its meat snacks division to Jack unileverLink’s. The unit includes the BiFi brand,products of which are sold in Northern Europe, and Peperami snacks which are on sale in UK and Ireland.

But Unilever has also proved that it is willing to splash the cash should the right opportunities emerge, particularly if potential acquisitions supplement its quest to ratchet up its exposure to the lucrative emerging markets of Asia.

The company hiked its stake in Indian arm Hindustan Unilever to 67.3% last July from 52.5% previously, for approximately €2.49bn. Unilever had initially sought to acquire three-quarters of the business, the maximum holding available for the subsidiary to maintain its stock listing in India.

Earnings bounce expected following difficult 2014

Still, City brokers expect a backdrop of pressure on emerging market consumers to affect the household goods giant’s growth prospects in the immediate term, and anticipate a 2% earnings fall during the current year. Still, improving conditions in these markets are expected to result in a robust 8% earnings rebound in 2015.

These projections leave the firm dealing on P/E multiples of  19.3 and 17.8 for 2014 and 2015 correspondingly, far ahead of the bargain benchmark of 10, readings below which are generally considered decent value for money.

But in my opinion, Unilever’s significant exposure to developing markets justifies this premium to its peers, with accelerating disposable incomes and population levels in these regions set to drive revenues skywards. Driven by its portfolio of industry-leading labels, from Dove beauty products through to Cif cleaning agents, I believe that the firm is in great shape to enjoy strong earnings expansion, helped by its ongoing self-help programme.

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Royston does not own shares in Unilever. The Motley Fool owns shares in Unilever.