Commodities crunch worsens for consumers and companies

By Brad Dorfman

Food, beverage and household products companies have been pressured for months by rising commodity costs and their stocks have paid the price, but Kimberly-Clark Corp (KMB.N) showed on Monday things could be even worse.

"I think it is going to be really tough for a lot of these companies to post great quarters," said James Tierney, chief investment officer at investment adviser W.P. Stewart.

Kimberly-Clark kicked off a flurry of earnings for consumer packaged goods companies by saying costs for oil-related materials and other items were rising more than twice as fast as the company had expected and also said it would raise prices on a swatch of products.

Crude oil is currently trading near 3-1/2 year highs, while companies are also coping with soaring costs for grains, cocoa and other ingredients and materials.

Investors have known this for a while and many of the biggest consumer products makers have underperformed the 6.2 percent increase of the Standard & Poor's 500 .SPX this year.

PepsiCo Inc (PEP.N) shares are up 2.8 percent this year, Procter & Gamble Co (PG.N) is down 1.8 percent and Kraft Foods Inc (KFT.N) is up 5.3 percent.

The companies that will likely survive the commodity headwinds are the ones that can pass on prices without U.S. consumers balking, or those that have strong sales in emerging markets, where incomes are growing and consumers are looking to buy more branded products.

Those companies include Coca-Cola Co (KO.N), P&G and PepsiCo, said Gary Bradshaw, a portfolio manager with Dallas-based Hodges Capital Management.

"If earnings continue to come in like they have the last few quarters, and I expect that they will, I still think you're going to see some multiple expansion," he said of those companies.

NOT QUITE YET

Tierney agrees that P&G and PepsiCo, which his firm owns, are "cheap." PepsiCo trades at about 15 times expected 2011 earnings per share, while P&G trades at 16 times. Both are scheduled to report earnings on Thursday.

But he also said he is not expecting immediate multiple improvement, and instead thinks investors will want to see commodity inflation abate or unemployment fall before they pour more money into the sector.

"You need a much healthier consumer and you can get there one of two ways, one being wage inflation and the second being the lessening of the commodity headwinds," Tierney said.

Most consumer products companies have announced price increases to help cope with rising costs.

"The most important thing is pricing power," said Luke Rahbari, a partner with options trading firm Stutland Volatility Group. "Can they raise prices and still have the same number of sales, and if they raise prices, will they lose market share?"

But with consumers also feeling the pressure of gasoline near $4 a gallon, investors will be watching earnings reports to see if those price increases are driving away customers.

One company that could be vulnerable to rising gasoline prices in coming months is chocolate maker Hershey Co (HSY.N), said Erin Lash, who follows food and household products at Morningstar.

Hershey, which reports earnings on Tuesday, is trading at about 20.4 times estimated 2011 earnings, meaning the advantages of having pricing power and little private-label competition are already priced in, she said.

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