DAILY CHALLENGE WEDNESDAY, APRIL 27, 2011
19
Commodities crunch worsens for consumers and companies By BRAD DORFMAN CHICAGO — Food, beverage and household products companies have been pressured for months by rising commodity costs and their stocks have paid the price, but KimberlyClark Corp. 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 compa-
nies 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 this year. PepsiCo Inc. shares are up 2.8 percent this
year, Procter & Gamble Co. is down 1.8 percent and Kraft Foods Inc. 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., 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 quar-
ters, and I expect that they will, I still think you’re going to see some multiple expansion,” he said of those companies. 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 pres-
GM minivan gone in U.S., but still thrives in China By BEN KLAYMAN SHANGHAI — General Motors Co. killed its minivan in the U.S. market thanks to its soccer-mom stigma, but the automaker has carved out a highpriced niche for the vehicle as a chauffeurdriven executive ride in China. While many American families have shifted to crossover vehicles that offer space similar
to minivans without the perceived dowdiness, China’s business elite like the Buick GL8’s roominess and features for getting around in the world’s largest auto market. “The market for this really only exists in China and it’s a niche that we pretty much dominate here,” Lowell Paddock, vice president of planning for GM’s international operations, told Reuters last week at the Shanghai auto show.
Sales last year for the GL8 were 52,127, what Joseph Phillippi of AutoTrends Consulting called a “rounding error” in China’s 17.2 million light-vehicle market. Sales have hovered in that area the last several years for the Shanghai-built minivan. While a far cry from the 336,000 minivans GM sold in the United States in 1999, the Buick minivan is proving quite popular with its Chinese customer
base since its launch there in late 1999. GM stopped making minivans for the U.S. market in the fall of 2008. “The demand for the GL8 is just huge. It’s unbelievable,” GM’s China chief Kevin Wale told reporters in Shanghai. “So many people ringing me up, saying, ‘I’ve ordered one. Can you get it to me quicker?’” GM has looked at bringing the minivan back to the U.S. and Canadian markets
Boeing says mid-year decision on 737 line possible MEXICO CITY — Boeing Co. said it could make a long-awaited decision on the future of its popular 737 aircraft line by the middle of this year. “We are doing a flight-test program to test improvements to the airframe and the engine to improve the efficiency of the airplane another 2 percent,” Randy Tinseth, the marketing vice president for Boeing’s commercial aircraft division, said of the 737 line. “This, coupled with improvement over the last 10 years or more, means that the 737 we deliver in 2012 will be about 7 percent more
fuel efficient,” he told Reuters in Mexico City. Boeing was still evaluating whether to build an all-new 737 line or add a fuel-efficient engine to the existing line. “We are leaving our options open,” Tinseth
said. The company expects to maintain its third-quarter delivery target for the longdelayed 787 Dreamliner, Tinseth said. In a presentation to reporters in Mexico, Tinseth said the world’s
second-largest commercial plane maker expects Latin American airlines will need 2,180 new planes — worth around $210 billion — to expand over the next 20 years. Separately, Tinseth said the company was working with the National Transportation Safety Board after a preliminary report on Monday revealed possible manufacturing flaws and more evidence of fatigue cracks in a Southwest Airlines Co. jet that experienced a mid-flight fuselage rupture on April 1. “We continue to work with them and support them as needed.”
using the GL8, but officials acknowledge for now the plan is for it to remain on sale only in China. “They’ve looked at it on and off as long as I’ve been out here,” Wale said of U.S. officials. “They’ve made a fundamental decision that says demand for that type of product’s not strong enough. We say that’s fine. We’ll just keep selling out here.” The vehicle, built at a plant GM operates under a joint venture with China’s SAIC Motor Corp., generates a “boatload of money” because it is based on an old U.S. minivan platform that does not require a lot of investment, Phillippi said. However, it would likely be costly to upgrade the GL8 to match current U.S. safety and feature requirements. “I doubt whether the electrical or electronic architecture could handle the kind of hardware and technology you’d want to put into it to make it for the U.S.,” he said. “I love the car, but it may be impossible without massive investment.” For instance, Susan Docherty, head of sales and marketing for GM’s international operations acknowledged the vehicle lacks
sure 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 privatelabel competition are already priced in, she said. the third-row, fold-flat seats U.S. car buyers prefer. However, the newly redesigned GL8 and its still-available predecessor, the GL8 First Land, can boost sales in China as it lures some luxury-seeking customers, she added. The minivans sell for the equivalent of $35,000 to $58,000 in U.S. dollars. Any additional demand in China could be met by boosting output as much as 30 percent at the Shanghai plant by adding another crew of workers, GM executives said. Paddock emphasized no changes would be made that would disappoint the GL8’s core Chinese executive customers. GM even markets the GL8 in China as “business class on wheels.” “We wouldn’t tamper with that to meet another market’s requirements,” he said. “It’s important that that be spot on in the China market.” At a time when GM is focused on building cars it can sell globally, China executives at the U.S. automakers are perfectly happy to keep the GL8 a China-only story. “There is still space for local programs and because of the size of the (Chinese) market they can be very successful,” Wale told Reuters.