Branded and packaged consumer goods colossus Unilever (ULVR) appears to be over a recent organic growth trough, with top-line momentum building and cost-conscious management delivering on margin improvements.

Shares is increasingly positive on the PG Tips-to-Magnum ice cream maker, a business with myriad competitive strengths including a balance sheet providing firepower for earnings-enhancing M&A.

Growth levers

Shares regards the Anglo-Dutch consumer goods powerhouse as a core holding for a well-diversified portfolio. A group with 130 years-plus heritage, the £36.9 billion cap is one of the world’s leading suppliers of food, home and personal care products, with sales in over 190 countries and products reaching 2 billion consumers a day.

Guided by sustainability-focused CEO Paul Polman, Unilever boasts an enviable portfolio of globally-beloved brands spanning everything from Persil and Dove to Domestos, Marmite, Lipton, Lynx and Ben & Jerry’s. Ownership of these brands confers inflation-proofing pricing power upon Unilever, which benefits from highly-predictable earnings that compound over time. Deeply-entrenched, with decades-old distribution arrangements, Unilever products should still be generating respectable returns for many years to come.

EM upside

Over half the company’s footprint is in developing and emerging markets; perceived as a short-term negative given the recent sell-off in emerging market assets. Many emerging markets remain weak, with currency devaluations squeezing disposable incomes of consumers in many developing markets. Yet at the same time, this emerging markets bent is a key strategic asset that should drive superior long-term sales growth for Unilever, which recently pleased with an excellent third quarter trading statement (15 Oct).

This revealed 5.7% organic sales growth - volume up 4.1%, price by 1.5% - in part reflecting strong ice cream sales, a weak Chinese sales comparator and advanced sales into Latin America. Yet the underlying growth rate showed acceleration on the first half, while emerging markets underlying sales growth was strong at 8.4%.

Despite soft global markets, Polman guided towards underlying sales growth for the year ‘towards the upper end of the 2-4% range’, while also continuing ‘to expect steady improvement in core operating margin and strong cash flow’, aided by a continuous focus on cost.

Bulls point out Unilever boasts a formidable pipeline of new products, many being innovations behind premium brands, which are weighted towards this year’s second half. Shares believes this product pipeline holds the key to the delivery of positive earnings surprises, both near-term and in the years ahead.

Growth: MEDIUM

A strong innovation pipeline supports a positive growth outlook despite fragile consumer sentiment.

Risk: MEDIUM

Exposure to FX volatility and a hard-pressed emerging market consumer is a concern.

Quality: HIGH

Unilever has established an economic moat through investment in a global portfolio of enviable brands.

M&A upside

Geographically-diversified, Unilever is very cash-generative and also benefits from an unleveraged balance sheet. Not only does this mean it has the financial firepower to withstand near-term volatility in developing markets or currencies, it also has the financial strength to continue funding its progressive dividend and potentially turbo-charge earnings through bolt-on acquisitions. M&A is an important part of Polman’s long-term growth strategy, with the personal care arena high on the hit list.

Berenberg has a ‘buy’ rating and £32 price target implying upside of 12.6%. For 2015, it conservatively forecasts 9.6% top line growth to £37.3 billion, driving earnings per share 13.7% higher to £1.29, supporting a dividend hike to 85p for a dividend yield of 3%. For 2016, the bank envisages earnings 5% higher to £1.35, underpinning growth in the shareholder payout to 90p.

Unilever (ULVR) £28.42

Stop loss: £22.74

Market value: £36.9 billion

Prospective PE Dec 2015: 22.0

Prospective PE Dec 2016: 21.1

Prospective dividend yield: 3%

Bid/offer spread: 0.04%

Analyst price target: £32
*Berenberg, 19 Oct 2015