Lansdowne Partners, one of London’s largest hedge funds, is known for putting big bets against some big companies. The fund is now betting against Unilever plc (NYSE:UL) (LON:ULVR), one of the largest consumer discretionary companies around the globe. Currently the short position amounts to $325 million (as of yesterday’s closing price), or 0.6% of Unilever’s outstanding shares. The position was disclosed in mid-February and increased in late March.
Unilever is Lansdowne’s bet against emerging markets
The best guess for the fund’s thesis regarding this short would be the slowdown in emerging markets. The region makes up 57% of Unilever plc (NYSE:UL) (LON:ULVR)’s revenue and has lately been a tough place to be in due to currency devaluation. In a recent interview with Bernstein Research, Unilever’s CEO Paul Polman said that he was more optimistic about emerging markets than the developed region. He said,
“I think that it is still an enormous advantage to have a broad presence and footprint in the emerging markets. I still stick by my rough projection that by the end of this decade, the EMs will be 70%.”
Regarding developed markets, Polman said,
“These markets have continued to struggle to grow…population is going down and consumers have less money in their wallets. We continue to expect low growth in these markets, but our strategy of taking costs out, of continuing to work our portfolio and divest non-strategic slower growing brands… and driving innovation… is the right strategy”
This won’t be the first time hedge funds have looked to cash in to the slowdown in EMs. Lansdowne and others have bet against asset managers with high exposure to emerging markets before. The equity long/short hedge fund has a colorful ensemble of short bets which span across industries. Specifically in the consumer goods sector, Lansdowne is shorting Wm. Morrison Supermarkets plc (LON:MRW), Tesco PLC (LON:TSCO) and J Sainsbury plc (LON:SBRY).According to Capital IQ, the total value of Lansdowne’s long holdings in consumer discretionary sector makes up for 39% of its portfolio, amounting to a gross value of $4.8 billion.
Lansdowne’s massive short portfolio
According to Novus Research, the aggregate market value of Lansdowne’s Europe-based shorts eclipse $5 billion. For a fund with such heavy short exposure, Lansdowne has been doing well. The flagship Lansdowne Developed Markets Fund, managed by Peter Davies and Stuart Roden was up 4% in January and netted a 33% return in 2013. The strategy manages $8.1 billion as of June 2013. The total assets of the firm are up to $12.5 billion.
It is entirely possible that Lansdowne has been shorting Unilever for some time, and the position was only recently increased to the threshold level that enforced disclosure. The increase in the bearish bet is preceding the announcement of 1Q2014 sales on April 24. The company reported higher than expected sales for 4Q2013, which rose 4.1% in the quarter.
Recovery to strengthen at Unilever in later half of 2014
The latest note from UBS did not convey any excitement on the upcoming sales announcement. The company is facing pressure in emerging markets and Europe. UBS is predicting a 6% fall in sales to $15.6 billion due to currency charges. Further into the second half of the year, a recovery is expected which would partially attributable to recovery of local currency input cost inflation, which is not real growth in the opinion of UBS’ analysts. The consensus estimate for sales growth in Q1 is around 3.3%.
Deutsche Bank is more optimistic about Unilever’s current predicament. In a recent note, Harold Thompson and Gerry Gallagher note that the underlying fundamentals at UL are robust and the pressure from currency devaluations would eventually subside. The analysts said,
On a full year basis, we expect growth to accelerate aided by a recovery in the emerging markets in the later part of the year. We believe the good margin run will continue in 2014, making ULV’s EPS profile increasingly robust.
Unilever plc (NYSE:UL) (LON:ULVR)’s shares have gained 3% this year so far.