Consumer Products to the Rescue

GOOD MORNING. stocks in Asia closed mixed today; U.S. futures are pointing to a lower open.

Food companies tend to be steady winners in a recession, appealing to traders looking for shelter from more speculative firms. But can they prove appetizing in a recovering economy? That’s the big question traders may have for Unilever (UL), the giant consumer products company, which reported quarterly results today.

The Anglo-Dutch firm, whose 400 brands include Hellmann’s mayonnaise, Dove soap and Ben & Jerry’s ice cream, reported third-quarter profit and sales growth that beat analysts’ estimates. Revenues rose 3.4% to 10.2 billion euros, beating forecasts for a 3% gain. Net income fell to 1.05 billion euros ($1.56 billion), also ahead of forecasts for 997 million euros. The company is seeing “good progress across all regions and the majority of countries,” said Unilever chief executive Paul Polman in a statement. But he cautioned that “market conditions remain challenging.”

Unilever’s rivals have reported a mixed bag of earnings lately. Kraft Foods’ (KFT) third quarter results fell short of expectations (it’s gearing up to make a formal bid for Cadbury (CBY) next week). Unilever's European rival Nestle reported volume growth of just 2% in its third quarter, trailing Unilever’s results. But sales volume jumped 7.1% at French yogurt maker Danone (albeit thanks to big price cuts). In almost all cases, food companies have benefitted from lower commodity prices, which have lowered input costs for everything from packaging to cooking oils. But commodity prices have risen sharply in recent months and that should start to pressure margins in 2010, says analyst Nicolas Ceron of Numis Securities in London.

Unilever is in the midst of a turnaround aimed at reviving sales growth and coming out with higher-margin products. Polman, a former executive at Procter & Gamble (PG) and Nestle, is doing an impressive turnaround job so far, says Ceron. Still, Unilever may have a tough time beating forecasts as unemployment continues to rise in Europe and the U.S., and consumer confidence remains weak. And the company still needs to prove its recent sales growth is sustainable. “They need to be more competitive with their products,” says Ceron, who has a hold rating on the stock because he doesn’t think there’s more than 10% upside in the share price.

IN OTHER NEWS:

Is Starbucks (SBUX) serving up a better brew? Investors will be watching to see how strong the coffee company's same-store sales are when it reports fiscal fourth quarter results after the market closes today. Analysts are expecting earnings of 21 cents a share, up from 10 cents a share in the year-ago quarter, on revenue of $2.39 billion, down 5% from a year ago.

Starbucks has cut costs by closing stores, letting workers go at the regional and corporate levels, and finding efficiencies in stores and in the supply chain, says Greg Schroeder, an analyst at Jesup & Lamont. Domestic same-store sales should show some improvement sequentially but are likely still below last year’s numbers, Schroeder says.

Analysts believe that same-store sales continue to show month-to-month improvement, but management isn’t likely to provide detail on sales beyond the September quarter, says Jeff Farmer, an analyst at Jefferies & Company. The company pulled some more expensive merchandise from its stores in September of last year, bringing down the average amount each customer spends, but those year-over-year comparisons will get easier going forward, Farmer says.

Thanks in part to its cost-saving measures, Starbucks is now cash-rich, Schroeder says. The company’s best move would be to spend that money on international expansion, he says. Provided it makes that investment, including marketing its new instant coffee product abroad, where it’s more likely to be popular, “Starbucks is still a growth company,” Schroeder says. Management may offer some commentary on plans for international markets during the company’s conference call with investors at 5 p.m.