Unilever is one of the UK's successful firms in the consumer goods industry. The specific sector the group is listed in is food producers and it is likely that most of us will have sampled some its products. These stretch from Magnum ice creams and Cornettos to Persil and Domestos. Or from the fridge to bathroom shelves.

We recently recommended Reckitt Benckiser, which is also in the consumer goods industry, on the basis that worries about Western economies had made the stock inexpensive. This is also the case for Unilever and both firms have strong exposure to emerging markets which in any event will boost growth and profits.

Clearly the consumer in the West is suffering but the makers of branded consumer goods products have some pricing power. This is because products are differentiated and the brands created generate loyalty amongst consumers. Having said that consumer goods groups have become more competitive towards each other with Proctor and Gamble stepping up its efforts to increase market share.

On the whole though we believe consumer goods companies are a robust way to get exposure to the growth of emerging markets. This is as the new middle class in countries like China and India looks towards higher quality consumer products and also often puts a higher degree of quality on Western brands.

Looking at the weekly chart of Unilever we can see that since putting in a high of 2024p on the 31st of December the share price has pulled back to the 1700p support level. This pullback represented a 38.2% Fibonacci retracement of the bull run that began in March 2009. The weekly MACD looks poised to generate a bullish signal as the 1700p long term support level looks to have halted the decline.

Looking at the daily chart of ULVR we can see that since finding support at 1700p the share price has turned higher and is currently testing resistance at the 50 day moving average. The daily RSI is trending up and is yet to register an overbought reading. As such we would expect to see a continuation of the move higher and a retest of the 200 day moving average which is currently at 1877p.

Unilever Primer

Unilever generates more than half its sales from food while over half of sales come from emerging markets. This distinguishes the group from Reckitt Benckiser which has minimal exposure to food at only 3.5% of sales in 2009. Thus Unilever is listed in the food producers sector while Reckitt sits in the household goods sector while both these sectors come within the broader consumer goods industry.

Looking at half-year 2010 results for Unilever show that the company is diversified across a range of consumer product categories with four main areas:

Half Year 2010 (six months to end of June):

The main competitors for Unilever are the multinational firms focused on any of the areas of food, personal care and household care. Thus Reckitt Benckiser is one competitor while others include Danone, Henkel, Kraft Foods, Nestle, Pepsico, Procter and Gamble and Sara Lee.

Like Reckitt Benckisser, the group seeks to focus on its key brands and of these the top 13 brands represented nearly 75%. While these can be marketed by different names in different countries many will be familiar to UK consumers:

Top 13 Brands:

The group hired Paul Polman as CEO in January 2009 from Nestle where he had been serving as chief financial since 2006. Mr Polman is also a veteran of rival Proctor and Gamble where he worked for 27 years and rose to become Group president of Europe in 2001. Clearly the industry experience of Mr Polman should bode well as he seeks to make the group more innovative and drive growth at Unilever.

As such Mr Polman at the group's AGM this year boasted of doubling the incremental turnover achieved from new innovations. He also said that innovations are getting bigger and therefore the pipeline is expanding. Successful innovation tied to strong marketing has been key to the success of Reckitt Benckiser and so a greater focus on this area should pay dividends for Unilever.

The group is also pushing products into markets which haven't yet experienced them. Examples include ice-cream in Vietnam, Surf in Nigeria, Cif in India and Lipton tea in the UK. On the acquisition front Mr Polman has also been relatively aggressive although this is not without risks. In 2009 the group spent more on acquisitions than it did on divestments which is the first time in a decade that this occurred.

Financials

The most recent half-year results from Unilever were received somewhat negatively by investors as the problems of weak developed market growth remain. Further concerns are cost inflation, competition and pricing pressures. Thus in our view the present time is an opportune one to take a position in Unilever in order to benefit from the firm's long-term growth potential.

Looking at the interim results in more detail and the headline figures are impressive. Turnover roses 9.7% in the half year although underlying sales growth was more constrained at 3.8%. The difference was because currency was a big contributor to the sales growth at 5.6%. The underlying drivers of sales growth were a 6.6% increase in volume/mix set against a negative 2.6% price impact.

In any event the sales rise flowed down to the bottom line with operating profit up 20% and net profit up 35% and EPS rising 36%. This is clearly a one-off increase as operating profits contributed to only 10% of the rise with other factors such as currency, restructuring and disposals being important. Nevertheless, Unilever does appear to be on the right track.

The key is that having experience volume and price pressure during the downturn these two factors are turning around. Volumes contracted in the fourth quarter of 2008 and the first quarter of 2009 following the Lehman collapse and its effect on credit and growth. However, the group has been growing volume since then but has been hampered by weak prices.

In fact quarterly price changes have been negative for a year but the second quarter of 2010 saw a smaller fall than each of the prior two quarters. Thus pricing looks set to turnaround and have a positive impact on results in the second half of the year. When both volumes and prices move in step profits growth can be strong and as such Unilever looks set to produce good profits growth in the next few years.

Sentiment towards the stock is therefore likely to change and the rating is also likely to improve as emerging markets become a larger part of the group's business. Competitive risks and cost pressures remain but we believe new CEO, Paul Polman has the experience to meet these head on. In the longer-term Mr Polman should also have a positive impact on growth by making the company more focused and innovative.

Accordingly, we recommend Unilever as a buy to all members at £17.80.