Unilever joins Europe's food top table

Fri Aug 10, 2012 1:34pm EDT

* Unilever wins comparisons with sector leader Nestle

* Danone needs to rebuild credibility after warning

* Unilever switched emphasis from short term targets

By David Jones

LONDON, Aug 10 (Reuters) - Long the laggard among Europe's food groups, Unilever is finally earning a place at the top table as far as investors are concerned by grinding out consistent results.

Although the Anglo-Dutch group's profitability still lags shareholder favourite Nestle, it has overtaken French group Danone on that score and its shares now trade at a ratio to earnings not far short of its Swiss rival.

Marathon-running chief executive Paul Polman set out for the long haul when he took over 3-1/2 years ago, abandoning short term financial targets that had played havoc with planning.

Instead, Unilever put its investment emphasis on truly global brands such as Lipton tea, Ben & Jerry's ice cream and Omo detergent, taking them into fast growing emerging markets while launching new products alongside.

The reward is a valuation to match the world's biggest food group by sales, Nestle.

Both companies fought through a choppy world economy with barely a scratch in the first half while Danone lost credibility with a shock profit warning after sales slumped in recession-hit Spain.

The three are Europe's biggest food groups by far and among the six biggest globally so financial analysts tend to weigh them against each other.

Unilever's shares have risen more than 10 percent since Danone's profit warning in June and it now trades at 16.9 times forecast 2012 earnings - close to Nestle's 17.2 and well above Danone's 15.2, according to Thomson Reuters data.

"Unilever is now significantly better managed and can deliver strong and consistent operating performance into the medium term," analyst Andrew Wood at Bernstein Research said.

More than half Unilever's sales are from soaps, shampoos and detergents rather than food, but it has also done better than its main rival on the consumer goods front - U.S. giant Procter & Gamble - whose profits have stagnated for three years.

Before Polman, 56, took over, Unilever had lurched from raising marketing spending one quarter to cutting it back the next in order to meet short term targets.

Tears came in 2004 when it issued the only profit warning of its 82-year history.

Unilever is now vague about its short-term expectations.

Its Dutch chief executive, who toyed with the idea of becoming a priest in his youth, preaches a simple message to shareholders interested in quick returns: Go elsewhere.

NESTLE MAN

Unilever now looks more like Nestle, which has a long-term model of raising underlying sales by 5-6 percent a year and steadily improving margins and profits, analyst Wood believes.

Danone's management had lost the trust of investors after the high-priced acquisition of Dutch specialist baby food group Numico in 2008, an emergency rights issue in 2009 to cover that cost and now the profit warning, Wood said.

"The more Unilever moves towards Nestle's reputation for reliability, the more we will like the stock. Danone looks too risky at the moment," said one London-based fund manager who owns shares in Unilever.

Emulating Nestle comes easily for Polman. He was finance director at the maker of Kit Kat chocolate bars and Nescafe for nearly two years after an early career at Procter & Gamble.

Under Polman, Unilever's underlying sales growth has averaged 5 percent.

Margin growth has been less successful. Although Unilever's profitability is now close to Nestle's, the fact that it dipped in 2011 remains a concern for investors who prefer to see a steady track record of improvement.

"It is the last piece of the jigsaw for Unilever," the fund manager said.

Unilever is on track for a 0.2 percent rise in its 2012 operating margin to 15.1 percent, while Nestle's will rise by a similar amount to 15.2 percent, analysts said. Danone has warned of a 0.5 point slide to 14.2 percent.

Explaining its difficulties, the maker of Activia yoghurts said Spaniards with falling incomes had switched to cheaper products while commodity costs had risen.

The Paris-based group sets annual targets for sales growth, margins and cash flow and can get caught out if its big costs, such as milk prices, rise sharply or if its key markets take sudden turns for the worse.

Unilever's wider geographic spread and tighter cost control also helped it cope better.

Spain accounts for 7 percent of Danone's global sales, but Unilever has less than 4 percent of sales in the southern European economies of Spain, Portugal, Italy and Greece, which are suffocating under the euro zone debt crisis.

Danone depends on yoghurt for 60 percent of sales and blamed a rise in milk prices in part for its problems. Investors said Unilever had done a better job than Danone of managing cost increases for its somewhat different range of ingredients.

Danone's share valuation makes it look tempting, but still not a risk worth taking with the chance of margins heading lower, said analyst Jamie Isenwater at Deutsche Bank.

"Spain continues to deteriorate month after month and advertising and promotional spend is being cut again for the third year in a row so the trends may prove tough to turn around," he said.

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