Pair Trade: Long Unilever - Short L’Oreal

Wednesday, September 26th 2012

Margin sustainability could be an issue in the European Food & HPC sector over the next few months. We choose Unilever

(last price: €27.97) for the long side of this pair trade. The company continues to reshape its portfolio, with an increasing

exposure to emerging markets. For the short side, we’ll choose L’Oreal (last price: €96.95).

Unilever’s good performance (prices and volumes) in H1 2012 points to the quality of the company’s portfolio. Its HPC divi-

sion is still enjoying a good market share momentum.

The company has a diversified and complementary portfolio: a combination of a Food cash cow division with an emerging

markets-focused HPC unit. Taking into account Unilever’s scale in some local markets, margins could gradually continue to

improve. Moreover, investments in new countries should progressively start to pay-off.

Unilever’s food division is being reshaped. The company wants to:

Upgrade the competitiveness and profitability of some businesses;

Develop some underappreciated brands;

Maintain the competitiveness of the portfolio’s more cash generative brands;

Possibly eliminate less interesting franchises.

As a result, the portfolio should become more focused and with a higher exposure to emerging markets. A refreshed food

portfolio should be able to maintain an attractive organic sales growth.

L’Oreal is the world’s largest cosmetic group, with a strong brand portfolio. The company sells all over the world, from

Europe, to South America and the Middle East.

H1 2012 revenues increased 10.5%. Consumer products is still the most important business division, with 49% of the

group´s total revenues. L’Oreal Luxe continues to be a highlight, with solid LFL sales growth and a positive margin evolu-

tion. The company is still increasing its exposure to emerging markets. Sales growth in China, Hong Kong, Indonesia and

Thailand remain particularly strong. Western Europe continues to be the weaker geographic area due to the region’s lower

economic growth.

The global cosmetics market could display some slowdown in H2 2012. L’Oreal may be able to out -perform the market,

given its scale and global presence. Nevertheless, growth will probably be back-end loaded, as the bulk of product

launches are expected to fall into the latter part of the year.

The cost of growth in cosmetics, higher competitive intensity and promotional activity (launch of new products) could weigh

on H2 2012 margins.

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