There were few surprises in Unilever's (ULVR) 2015 full-year results, with underlying earnings per share of €1.82, core revenue growth of 4.1% and an adjusted EBIT margin of 14.8%, all of which were in line with our forecasts. Conditions remain challenging, and we expect a slowdown in reported results next year, but for long-term investors willing to look past near-term volatility, we think there is modest upside to this high-quality business.
The emerging-markets slowdown is likely to affect Unilever more than most
The robust performance evident in these results highlights the entrenched position enjoyed by Unilever in its customers' supply chains, and we reiterate our wide economic moat rating. We may increase our fair value estimate slightly, but only to account for the time value of money, as cash flows track in line with our forecasts.
Underlying sales growth of 4.9% comprised 2.9% higher prices and 1.9% volume growth. This was a sequential slowdown from the 5.7% growth in the third quarter. Given the deflationary environment in Europe, where fourth-quarter pricing was negative 2.2%, and the emerging-markets slowdown, this is a solid achievement for Unilever, which appears to be gaining share globally. We believe this is testament to its intangible asset moat source: its ability to spend on reacquiring consumers and its strong relationships with retailers that allow it to increase its shelf space.
Although Unilever finished the year off in fairly strong fashion, we expect next year to be more challenging. Europe is likely to remain deflationary, though declines in some raw-material costs should offset much of the top-line pressure, and the euro looks likely to be much less of a tailwind. Slowing global growth is likely to make the 7.1% sales growth generated in emerging markets in 2015 more difficult to achieve this year, particularly if commodity prices remain depressed. We forecast 6% earnings per share growth for the full year, driven by an above-consensus 2% sales growth and 40 basis points of EBIT margin improvement.
Most of the company's near-term challenges are cyclical. The emerging-markets slowdown is likely to affect Unilever more than most, as it generates 58% of its sales from developing markets, making it one of the strongest emerging-markets plays in our consumer defensive coverage. Nevertheless, long-term drivers (including population growth, above-average rates of urbanisation and per capita income growth) remain in place, and we think Unilever can sustain a 5% organic sales growth rate in the medium term. On this basis, we believe the shares are slightly undervalued, and along with Procter & Gamble, Unilever offers one of the most attractive opportunities in the household and personal care space at the present time.
