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Six U.S. consumer stocks to watch

The consumer sector is showing signs of a rebound, with key economic indicators pointing to better days ahead. The U.S. Commerce Department and Labor Department released new data this week that shows a recovery in retail sales and a taming of core inflation in March.

And as a growing number of economists declare the worst of the global economic downturn to be over, the upcoming wave of earnings reports for the consumer goods sector is all the more anticipated. In light of this we scoured the sector to find these, the six consumer goods stocks to watch in the coming quarter.

PepsiCo

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We start with soda giant PepsiCo , which in March announced that it had completed the $7.8-billion acquisition of its two largest bottlers -- Pepsi Bottling and PepsiAmericas -- an act that earned praise in the investment community. The company has projected pre-tax annualized synergies of about $400-million by 2012 from the deal.

But while Argus Research analyst Erin Smith agrees that the big purchase should gradually lead to substantial benefits for Pepsi -- it would consolidate a great majority of the company's North American selling and delivery systems into a single unit -- she has expressed concern about volatile results this year due to integration issues and ongoing challenges in the developed markets. Ms. Smith also notes that even though the stock has recently climbed, it could, very likely, end up moving in line with the S&P for a couple of upcoming quarters.

That said, when Pepsi reports, Ms. Smith says she would like to see how the integration of Pepsi and its bottlers are coming along. "I'd like to see if there's continued improvement in volumes at Pepsi.... I'd like to see if there's been any improvement in carbonated soft drinks volumes," she said.

Ms. Smith says she would also like to determine more about whether Pepsi is still seeing weakness in developed markets, or whether it's been seeing improvements.

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Argus Research, for its part, is raising its 2010 earnings estimate for Pepsi to $4.18 a share from $4.16 a share. Argus said that Pepsi posted a solid fourth quarter, but that volume was upset by softness in the North America beverage category, the heaviness of promotions in its North American snack unit, and lower Europe snack volumes.

Coca Cola

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Following the coattails of rival Pepsi, with its bottling acquisitions, Coca-Cola in February announced that it has agreed to buy the North American bottling business of its bottler Coca-Cola Enterprises. The aforementioned Argus declared this to be a good move, in that it will enable Coke to bolster its bottling operations, cut down costs and beef up its product portfolio, all of which would help to strengthen the company's relationships with customers.

Still, Ms. Smith warned that the North American market will likely remain challenging, and that its bottling deal probably won't be accretive to earnings until 2012. Coke said it expects the transactions to generate about $350-million in synergies over four years, in the substantially cashless deal. As part of the deal, Coca-Cola Enterprises has agreed to buy Coke's bottling businesses in Norway and Sweden, while obtaining the right to buy the controlling stake in Coke's German bottler.

When Coke reports, Ms. Smith, for her part, will be keen to find out whether Coke and its rival Pepsi are "both seeing the same thing .. or is one company seeing one thing and the other seeing something else?" The question she says she'll be keeping in mind for both companies is whether they're both seeing volume trends improving in developed markets and in their carbonated soft drinks businesses, as the economy picks up the pace.

Argus Research is raising its 2010 earnings estimate from $3.40 a share to $3.43 a share, encouraged by Coke's improved volume trends, such as a 5 per cent rise in unit case volume during the fourth quarter and 3 per cent increase during the year. Argus Research also cited a 3 per cent rise in sparkling or carbonated drink volumes and a 9 per cent rise in still or non-carbonated drink volumes in that quarter, with the greatest growth coming from international markets.

Procter & Gamble

Procter & Gamble is gambling that now is the right time to play offense with its product launches -- and that has both investors and analysts focused on the company in the coming quarter.

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BMO Capital Markets' Connie Maneaty, for her part, says she will be keying in on Procter & Gamble's new product launches when the company reports its earnings. Ms. Meaneaty says she will continue to keep her eye on such factors as how the company is being impacted by the devaluation of the Venezuelan local currency and its tone regarding the return of consumers to P&G's more premium-priced products.

BMO Capital Markets recently raised its 2010 earnings estimate for P&G from $4.10 to $4.12 a share. Ms. Maneaty notes that she believes P&G, with its "biggest new product effort" in the last three decades, has "moved to offense" and that "this effort will make a meaningful impact on its sales and market shares."

One of P&G's largest product launches of late is the company's new Pampers with "Dry Max" technology diapers, which are thinner than previous diapers and offer 12-hour "wetness protection" if babies wet their diapers. Ms. Maneaty notes that the diapers offer "big product improvements ... but at no price difference." The company is also re-launching its "reinvented" Pantene hair care brand.

Noteworthy also is that upon speaking with P&G's CFO Jon Moeller, Bernstein Research analysts were surprised to learn that there has been a reversal in the company's longstanding position that certain emerging markets were "off limits," as they were particularly difficult to break into; such markets were referred to as "walled cities" by the company itself.

Mr. Moeller described a more deliberate effort to attack these "walled cities" on the back of bigger scale, such as Brazil (with toothpaste, laundry, etc.) and India (with laundry, diapers, oral care, etc.).

"On the one hand we are encouraged by the appropriate focus emerging markets now have for P&G relative to competitors, but are somewhat concerned about the cost and competitive response P&G's moves may bring to the overall profit pool," Bernstein Research analyst Ali Dibadj wrote in a note to investors.

Kimberly Clark

When Kimberly Clark reports its earnings, investors will be paying close attention to the company's outlook on commodities price inflation, given the continuing rise in the price of pulp.

"I'd like to get a sense of what their confidence level seems to be," BMO Capital Markets analyst Ms. Maneaty told TheStreet.

Goldman Sachs analyst Judy Hong said in an Apr. 8 note to investors that she felt Kimberly-Clark -- known for such brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend -- has been one of the most vulnerable names in consumer staples. Hong, like Maneaty, cites concerns about pulp prices, pricing-power limitations, and the company's roughly $1-billion exposure to polypropylene -- the polymer utilized in diapers for its super-absorbent properties -- which has been "tracking up more than 50 per cent from 2009 levels."

Despite this gloomy picture, Ms. Maneaty defends Kimberly-Clark, noting that the company isn't "content to sit back and let market share get whittled away by current economic pressures." The company is currently ramping up its innovation efforts, and in March announced the launch of three new products: Depends Underwear in colors and prints for incontinence, Kleenex Hand Towels, and U by Kotex feminine products.

Ms. Maneaty said that U by Kotex has a smart marketing message, snappy packaging and a fun web presence. She praises the new Depends Underwear as an incontinence undergarment that looks less like a puffy diaper and more like normal underwear. "In categories like this, this sort of thing matters."

Kimberly-Clark has reiterated its 2010 adjusted earnings guidance of $4.80 to $5 a share, compared with BMO Capital Markets' estimate of $4.89 a share and the consensus estimate of $4.87 a share. BMO Capital Markets has noted with interest Kimberly-Clark's desire to increase marketing spending more rapidly than sales and a new three-year cost savings target for the company's current cost reduction program of $400 to $500 million from 2011 to 2013.

Colgate-Palmolive

Morningstar analyst Lauren DeSanto has described Colgate-Palmolive as "one of the most operationally efficient household products companies in the world, with global market share leadership in toothpaste of 45 per cent and manual toothbrushes of 30 per cent."

Colgate is certainly not one to give in to business inconveniences, no matter the gravity of the situation. Ms. DeSanto noted in a recent equity research report that Colgate was able to boost its operating profit margins by more than 300 basis points and net cash from operations by 42 per cent from the year-ago period, despite foreign exchange headwinds that pummeled the company's fiscal 2009 top line outcome.

"By the end of fiscal 2010 we expect the firm will have more than $16 billion in revenue and be closing in on gross margins of 60 per cent," Ms. DeSanto wrote.

Of note, Ms. DeSanto believes that Colgate's new Sensitive Pro-Relief toothpaste, for those with tooth sensitivity problems, could serve as a driver of top-line sales growth, in excess of the long-term mid-single-digit growth rate that Morningstar is expecting.

Ms. DeSanto added that early results for the toothpaste are promising. "With sales growth in the segment in the high single digits and an estimated market size of $1 billion, Colgate management is understandably optimistic about the potential to take category market share," Ms. DeSanto wrote. Morningstar said that the new toothpaste will be available in about 81 of the 200 countries where Colgate currently operates, though not in the U.S, by the end of the year.

Still, "given the current economic climate ... and the super-premium positioning of the product, we're comfortable waiting to see how the introduction plays out in more markets," Ms. DeSanto wrote.

Morningstar is lifting its fair value estimate for Colgate to $92 a share from $79, based on better-than-expected progress in gross margins and its expecation that Colgate's five-year restructuring efforts are starting to bear fruition.



Johnson & Johnson

One key Johnson & Johnson initiative that investors should focus on in the coming months is the launch of hepatitis C treatment Telaprevir. JP Morgan analyst Michael Weinstein, for one, says the launch of Telaprevir is shaping up to be the "biggest launch for J&J over the next 24 to 36 months. We model a 2011 EU approval with 2013 sales of $2.14 billion," Mr. Weinstein noted.

JP Morgan analysts are looking at impending first quarter earnings with an earnings per share prediction of $1.30, which is 3 cents above the consensus estimate, on revenue of $15.69 billion. "Overall, we expect the top line to be in line with our forecast and believe JNJ will meet our $1.30 EPS projection from the combination of financial and operating leverage," Mr. Weinstein wrote in an equity research report.

Mr. Weinstein also says that although J&J's pharmaceutical franchise is up for another challenging quarter, he anticipates that it will begin to show grow again for the first time since the third quarter of 2008. What's more, he says he anticipates solid results from J&J drugs Velcade, Prezista, Risperdal Consta and Concerta to help offset the dragging effect of Topamax in the first quarter, with some newer products such as Stelara, Simponi, Intelence and Nucynta beginning to contribute.

Furthermore, J&J's medical device franchise should post another solid quarter, according to the JPMorgan analysts. "In orthopedics, the market's recovery continues to be gradual with the U.S. leading the way and Europe lagging," Mr. Weinstein wrote.

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