A surprise sales warning from Domestos-to-Cif maker Unilever (ULVR) after last night's market close paints a worrying picture for stocks with a large proportion of sales from emerging markets. The consumer goods company falls 3.7% to £23.49 as investors digest the news and analysts downgrade their earnings forecasts.


The news certainly wakes investors up to potential problems facing emerging markets-focused stocks. That certainly explains why Reckitt Benckiser (RB.) is down 2.3% to £44.14; Diageo (DGE) falls 1.7% to £19.31; and SABMiller (SAB) dips 3.1% to £30.45.


We've reported several times this year on cracks forming in emerging market territorities and Unilever's news makes this investment theme even more important to monitor.


ULVR - Comparison Line Chart (Rebased to first)


Unilever has revealed weaker market growth in many emerging market countries during its third quarter period. It now expects underlying sales growth of 3% to 3.5% in the quarter. This compares with a market consensus of 5%. Unilver adds that the market slowdown has accelerated as a result of 'significant currency weakening'.


Panmure Gordon says this is 'not a profit warning', at least not in the traditional sense. 'While the statement is clearly disappointing, it is reassuring that Unilever contrinues to grow ahead of its markets, expects an improvement in sales growth in the fourth quarter and contrinues to see margin improvement for 2013'.


The broker slashes its like-for-like sales growth estimate for the full year from 4.8% to 4.3%. It cuts earnings per share (EPS) forecasts from €1.54 to €1.52 for 2013; and from €1.62 to €1.60 for 2014. It retains a 'buy' rating.


Credit Suisse is less positive. It slashes 2014 EPS forecasts by 1% and reiterates an 'underperform' rating. It says: 'Growth was restored after aggressive focus on personal care and household care, especially in emerging markets. However, emerging markets growth is now slowing and FX offsets growth at the reported level. Meanwhile, share losses in developed market food and P&G's renewed marketing vigour in the US, means more investment needed. Athough many investors are used to looking at organic growth as the most important metric, in our view this is less relevant in times of emerging markets FX volatility, as the pricing element becomes something of a mirage.'


Oriel Securities downgrades from 'hold' to 'sell', saying Unilever's currency headwinds 'tend to confirm the danger of being a company with asymmetric growth between emerging and mature markets.'

Issue Date: 01 Oct 2013