This week’s positive update from Unilever (LSE: ULVR) (NYSE: UL.US) shows that, even when emerging market growth is below what many investors had hoped for, the company is still able to deliver strong performance. Indeed, shares in the company have posted impressive gains of 8% year-to-date, which is ahead of the 1% rise of the FTSE 100. They could, though, have further to go. Here’s why.
The types of products that Unilever sells are perfect for the next stage of growth of emerging economies such as China and India. That’s because Unilever focuses on consumer discretionary products, such as luxury food and personal care items that, although perhaps necessary in their basic form, attract the new middle classes of the emerging world. With wealth and prosperity continuing to increase in developing nations, Unilever should naturally see an increase in demand for its products in future.
This is why Unilever could prove to be a more attractive proposition than Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US). Certainly, Reckitt Benckiser also has potential in emerging economies, but its products tend to be more necessity than discretionary and, as such, it may not benefit to the same extent as Unilever does when the emerging middle classes come into existence on a vast scale.
Despite its share price rise over the course of 2014, Unilever still offers good value for money. For instance, its price to earnings (P/E) ratio is a rather hefty 20.6 at current price levels. However, earnings are forecast to increase by 9% next year and, when this is taken into account (as well as the previously mentioned longer-term growth potential), a P/E of 20.6 is more easily justified. Certainly, Unilever’s P/E has been higher in recent years, which shows that the market is willing to rerate the stock upwards and that there is the potential for this to happen in future.
Clearly, there is vast competition among consumer goods companies in emerging markets such as China and India. However, where Unilever appeals versus its peers is in terms of the investment it has made in recent years in developing customer loyalty in places such as China. Indeed, it has invested huge sums of time and money in ensuring that its products are prominently displayed in stores across the emerging world and has committed to a significant marketing budget that should pay off in the long run.
This, as well as having the right kinds of products (discretionary versus necessity) for the next stage of emerging markets’ growth and the scope to see an upward rerating of shares in the company, mean that Unilever could have a very bright future.
Peter Stephens has no position in any shares mentioned. The Motley Fool owns shares of Unilever.