Consumer Products Firms Seen Posting Higher Earnings
Household products makers like Procter & Gamble, Colgate-Palmolive and Unileverare expected to post double-digit quarterly earnings increases next week, but soaring oil prices could imperil future growth.
Price increases, new products, cost-cutting measures and strength in emerging markets have helped most of these companies weather surging raw material prices this year and the stocks have shown it, aided by a flight of capital to consumer staples shares as other sectors have been hit, analysts said.
But with oil above $90 a barrel, a 23 percent climb since the end of August, these companies might be hard-pressed to keep offsetting rising costs going into 2008, William Chappell, analyst at SunTrust Robinson Humphrey, said.
"How much do they need price increases to further offset it?" Chappell asked of rising oil and resin prices.
The answer will be closely watched, especially given that investors have already priced a great deal of the improved earnings into the stocks, analysts said.
P&G , maker of Gillette razors, Tide laundry detergent and a host of other products, has seen a 17 percent rise in its stock since the end of June and Colgate is up 14.3 percent.
Overall, the Standard & Poor's household products and personal care index index is up 13.2 percent in that time, compared with 1.6 percent rise in the Standard & Poor's 500 index.
Stocks Trading at High Multiples
Despite facing severe headwinds this quarter -- especially higher fuel, commodity and ram material costs -- most of these companies' stocks have outperformed the wider market.
"Given the outperformance heading into earnings, multiples and expectations are high, a deadly combination in this group," William Schmitz, analyst at Deutsche Bank, said in a research note earlier this month.
Colgate trades at 19.7 times estimated 2008 earnings, while P&G's multiple of 20.6 compared with a multiple of 18.8 for the S&P 500. Unilever trades at a multiple of 16.6, below that of European food companies Danone and Nestle.
P&G is expected to post quarterly earnings of 89 cents a share on Tuesday, up from 79 cents a year earlier, according to Reuters Estimates. Like most U.S. companies with a large overseas business, P&G is expected to get a boost from the weaker dollar, which lifts the value of overseas earnings when they are restated in dollars.
The dollar has fallen nearly 10 percent against a basket of six major currencies since January. The index hit a record low on Friday of 76.977. At the end of 2006, the index was at 83.720.
Strong growth in razors and beauty care should help offset higher coffee prices for P&G's Folgers coffee and other issues, William Pecoriello, analyst at Morgan Stanley, said in a research note on Oct. 24.
Colgate , which also reports on Tuesday, is expected to post earnings of 85 cents a share, up from 73 cents a year earlier.
The maker of Colgate toothpaste, Mennen deodorant and Irish Spring soap is about three years into a four-year restructuring, which has funded increased ad spending.
Clorox, on average, is expected to post 62 cents a share, down from 73 cents a year earlier when it reports on Wednesday. The maker of Clorox bleach, Hidden Valley Ranch salad dressing and Glad plastic bags faces not only higher oil and resin costs, but has also seen higher prices for the soybean oil it uses in its salad dressings.
Rising prices for edible oils have also been an issue for Unilever, and the company is likely to give a slightly guarded outlook when it reports.
Unilever , which makes Dove soap, Hellmann's mayonnaise and Sunsilk shampoo reports Thursday, with an average estimate of 0.32 euros a share for its third-quarter, up from 0.25 a year earlier.