A slowdown in organic sales growth by the world's biggest consumer goods company Procter & Gamble (PG:NYSE) paints a negative picture for sector peer Unilever (ULVR). With the latter's emerging markets growth continuing to struggle and ongoing foreign exchange headwinds, investors should be wary of the stock.

Pampers nappies-to-Tide detergents leviathan Procter & Gamble, planning to shed as many as 100 brands to hone its focus on core products and pare its cost base, flagged better-than-expected fourth quarter earnings (1 Aug). However, the 2% organic sales growth in the period was disappointing and triggered a downgrade in earnings forecasts by Canaccord Genuity.

We see negative read-across to Unilever, despite its brand strength and pricing power. The PG Tips-to-Magnum ice cream maker's first-half results statement (24 Jul) also proved mixed.

UNILEVER (UK) - Comparison Line Chart (Rebased to first)

Chief executive officer Paul Polman revealed a 5.5% drop in sales to €24.1 billion amid a further slowdown in emerging markets, notably Asia, and the boss also warned developed markets ‘are not yet picking up’. In addition, operating profits fell €209 million to €3.4 billion, below analysts' expectations, after a €413 million currency hit.

Though the Anglo-Dutch giant's personal care and home care businesses grew in the first half, the food business remains troubled and faces an uphill struggle in both North America and Europe. With emerging markets, accounting for around 57% of Unilever's overall revenue, continuing to slow, there could be further disappointments ahead.

Issue Date: 13 Aug 2014