Emerging Markets' Pain Pinches Unilever

 | Oct 02, 2013 | 6:15 PM EDT  | Comments
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It would seem obvious: If growth in developing economies is slowing and if the currencies of those countries have lost value against the U.S. dollar and the euro, then big multinational consumer companies might well be headed to a disappointing third quarter earnings season.

That's exactly what Unilever (UN) told Wall Street to expect yesterday. Sales in the third quarter would grow by 3% to 3.5% instead of the 4.5% to 5% range projected earlier. Shares dropped 3.4% on the day on the news.

Why did Unilever's warning come as a surprise? My best estimation? Because Wall Street had convinced itself that slowing growth and falling currencies would not be a big problem for multinational companies. For European companies, for example, HSBC calculated that since emerging markets account for about 15% of sales on average, then a 10% drop in emerging market currencies against the euro would amount to roughly a 1.5% drop in third quarter earnings.

No big deal.

But the announcement from Unilever was a reminder that some companies -- in fact the very global consumer companies that have been praised for their exposure to developing economies -- aren't average. Unilever, for example, gets 57% of sales from emerging markets.

For these consumer companies, the slowdown in growth and the decline in currencies, is a very big deal just because they have pushed so very strongly into these new markets.

What other companies look to share Unilever's exposure and stand to get punished in the third quarter earnings season?

Nestle (NSRGY:OTC) is a candidate, the markets said yesterday. Shares were down as much as 1.5% interday yesterday. Global brewer SABMiller, which gets about 25% of its sales from Colombia and South Africa, fell 2.58. Coca-Cola HBC (CCH), a Coke bottler in Europe, Asia, and Africa, dropped 1.4%.

If you've got a long-term view on global economic growth, I think you can appreciate the opportunity in the sell-off on this news. In the long-run the global consumer companies that will grow the fastest are those that -- like Unilever and Nestle -- have done the best job at building sales in the world's developing markets. Right now those companies and their stocks are being punished for their success moving toward that long-term goal. I'm not sure the markets have finished dishing out their punishment to these global consumer leaders, but at some point not too far down the road, far-sighted investors will buy to take advantage of the market's short-sightedness.

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