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Six Top Consumer Goods Stocks for the Coming Quarter

As the key consumer goods companies begin reporting their latest quarterly earnings, TheStreet focuses on the six with the most intriguing upside.

Impressed with



international exposure and ability to grow volumes without resorting to price discounting, Erin Ashley Smith of Argus Research Company considers Heinz a company with investment potential.

Smith, for her part, says she is currently looking favorably at companies that have avoided heavily discounting their products and still managed to grow volumes in the weaker economic environment. "When the economy does return to growth, if you discount too much, it will be difficult to raise prices when the economy recovers," Smith explains. She also prizes companies that have been able to control costs; management teams that have been able to do so have managed to grow margins despite the recent downturn.

Indeed, Heinz seems to fit all of Smith's criteria: the company has seen both top-line improvement and volume growth, has been able to maintain pricing without heavy discounting, has posted growing margins, and has realized cost savings. It even boasts, she says, an appealing exposure to international markets.

Thus, when Heinz releases its third quarter earnings on Feb. 25, Smith says she will key on how the company is faring in international markets, including the United Kingdom and emerging economies. She'll also turn a critical eye to Heinz's Smart Ones frozen meal brand, for signs of improvement. Last year was a tough one for the frozen meals business as consumers cut spending in the category.

Still Heinz's sales from continuing operations grew 2.5% to $2.67 billion in the second quarter, led by double-digit organic growth in emerging markets and acquisitions.

On Jan. 11, Heinz reaffirmed its earnings per share outlook of $2.72 to $2.82 from continuing operations for fiscal year 2010. Smith's own earnings forecast is in line with Wall Street consensus estimates of 71 cents for the current quarter and $2.82 for the year, at the high end of management guidance.

Smith currently has a buy recommendation on Heinz with a $50 price target, compared to Wednesday's closing price of $43.70.

Despite all the recent negative headlines related to

Johnson & Johnson

(JNJ) - Get Report

, there may, in fact, be relief on the horizon for the company's suffering investors. Jan Wald, analyst at Noble Financial Group, believes good times lie ahead for the company's stock performanced and, for his part, has a buy recommendation on the stock -- with a price target of $76, compared to Wednesday's $62.70 closing price.

Recently, the J&J brand name has been tarnished by the company's legal battles -- like the two class action lawsuits that have been filed against

Wal-Mart Stores

(WMT) - Get Report

and J&J over the sale of children's shampoo and baby wash -- allegedly containing a toxin linked to cancer,


reported earlier this month.

This news came shortly after the company's McNeil division issued an extensive product recall that the FDA claims came too late, as well as a Justice Department allegation that J&J and two subsidiaries have been supplying massive kickbacks to one of the nation's largest nursing home pharmacies.

Despite all this, Wald believes J&J has brighter prospects today than a year ago. J&J's new medical devices are performing well, and Wald believes close attention should be paid to the company's stents, orthopedics and vision care lines. The company also has a far greater number of drugs in its product pipeline. "I think if you look at the company's pipelines, they all seem to be stronger than a year ago," Wald says.

The group's clinical trials for pharmaceutical products are also going reasonably well right now, according to Wald. "

J&J has a number of interesting pharmaceutical products that are in phase 3," which means that the company will soon know whether the FDA will approve them or not -- which could definitely help move the stock price in the coming months.

Mind you, not all of J&J's legal battles have been harmful to the company. As Wald points out, J&J recently got a nice cash windfall after winning a $1.7 billion settlement from

Boston Scientific

(BSX) - Get Report

regarding a long-running patent dispute over heart stents.

Likewise, it's worth noting that Johnson & Johnson's better-than expected fourth quarter earnings surprised even a J&J bull like Wald. Last month, J&J reported fourth-quarter earnings of $1.02 a share and handily surpassing Wall Street consensus estimates of 97 cents a share. "We had expected them to meet, not so much as beat as they did," he explains. Wald points out that J&J's restructuring efforts greatly aided its bottom line.

In the vein, Wald believes J&J will continue to deliver and post another set of good results this coming quarter. He expects first quarter earnings of $1.22 a share and estimates $4.95 a share for the full year in 2010, up 6.9% from $4.63 in 2009.

As the parent company of Philip Morris, the largest tobacco company in the U.S.,


(MO) - Get Report

must constantly stave off competition. Rivals are eager to grab even a fraction of Altria's market share -- and frequently use aggressive pricing strategies to attempt to do just that.

Ironically, Altria's unlikeliest supporters -- the FDA -- could actually provide the company with much-needed breathing room from this competition. Philip Gorham, an analyst at Morningstar, notes that the FDA's restrictions on tobacco marketing actually help prevent rivals from splurging on large marketing campaigns. These restrictions provide a barrier to entry for upstarts in the market.

Another key area Altria investors should monitor is how the smokeless tobacco sector performs, says Gorham. "It's a way to catch smokers who quit. It's a way of retaining them." Altria is a competitor in this market as the parent of the U.S. Smokeless Tobacco Co.

The smokeless tobacco market is "Altria's only exposure to any kind of growth," Gorham says. While the cigarette business is declining 3% a year, the smokeless tobacco business is actually growing by 6%, Gorham says. However, it will take a while for Altria to fully realize the potential of its smokeless tobacco business; it's not expected to reach more than 15% of Altria's sales any time soon.

Gorham currently gives Altria's stock a 4-star rating out of five. He says the shares are slightly undervalued, but he recommends that investors hold back and wait for a dip in the price before jumping in. Gorham recommends a buy-in price of $16.80 compared to Wednesday's close of $19.40. "It's probably the cheapest of all domestic

tobacco stocks. We recommend waiting for a more attractive entry point." Gorham explains that the margin of safety will act as a buffer in case an unexpected event such as a lawsuit arises, which could impact the company's cash flow.

For Gorham, Altria is a "yield story" similar to other domestic tobacco manufacturers. Gorham points out that Altria just raised its dividend ratio to 0.8, which should increase its yield to 7.5% the next time it announces a dividend. "That's attractive," he says.

Although Altria missed earnings estimates by a penny last quarter, that isn't surprising, Gorhman says, noting that rivals, particularly

Reynolds American


, continued to aggressively price their own brands in the fourth quarter. "It was not surprising to see Altria's market share fall more than most," he says, adding that the excise tax in April was a contributing factor. Some companies have also taken the opportunity to further widen the price gap with higher-price brands such as Philip Morris USA's Marlboro brand. It was certainly a price competitive environment in the second half of last year.

"If Reynolds and other manufacturers extend

their pricing strategies I think Altria will continue to lose market share this year," Gorham says. "Volumes will probably drop by a rate that's a bit more than the industry as a whole." The problem for Altria is that lowering its own prices in response could lead to a pricing war which hurts all parties but could protect its market share. As Gorham points out, Altria has to walk a fine line between preserving market share and engaging in price competition that would likely impact margins.

The upside is that Altria's domestic rivals also have to struggle with this constant balancing act. Eventually rivals, such as Reynolds, will need to assess what its pricing strategy has wrought -- which could ultimately lead to a pullback in some of the aggressive pricing strategies, and provide Altria with more breathing room.

Sterne Agee analysts are forecasting a stronger year for toymaker


(MAT) - Get Report

based on their optimism surrounding the company's entertainment properties and new licenses -- including

Toy Story 3

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, new licenses for WWE (World Wrestling Entertainment) and Thomas properties. The incremental revenues from these new licenses could collectively add $250 million to the company's sales, according to Sterne Agee.

The analysts believe the WWE toy line will do well under Mattel's wing. "There will now be better play value and more authentic marketing muscle behind the

WWE line," analyst Margaret Whitfield says. Jakks previously held the license for the WWE line.

Likewise, Mattel looks set to follow through on former general manager and senior vice president Richard Dickson's strategy for the Barbie line: The "2010 line is set and they have the overall brand message put into place for 2011," Whitfield says. "

Dickson's impact will be visible."

The analysts have raised their Mattel projections for 2010 and 2011 to $1.72 and $1.90 from $1.62 and $1.81, previously. While 2009 was a challenging year for Mattel's top line, Sterne Agee is encouraged by gains in key segments such as Barbie, infant/preschool and wheels. Barbie's growth of 12% was the best gain reported by Mattel in many years.

Sterne Agee praises Mattel's balance sheet, with nearly $500 million cash, which they say will likely be used for dividends versus buybacks -- a boon to investors looking for a dividend-yielding stock.

Mattel's operating margins improved significantly in 2009 to 13.5%, but Mattel's goal is to achieve margins in the 15% to 20% range with a goal of sustaining the 50% gross margin reported in 2009, the analysts write. They have a buy rating for Mattel with a $28 price target compared to Wednesday's close of $20.30. The analysts said that results for the fourth quarter were significantly better than expected due to strong gross margins, while sales were in-line with expectations.

Morgan Stanley

(MS) - Get Report

analysts are watching


(ENR) - Get Report

with cautious optimism. On one hand, the company did quite well in the first quarter with an earnings per share surprise driven by a 21% profits upside. On the other hand, the analysts point out that almost all of the profit upside was a result of lower than expected ad and promotion spending.

Morgan Stanley is understandably concerned about risk surrounding Energizer's battery business. Underlying consumer demand for batteries remains weak and Morgan Stanley analysts believe the pricing environment will deteriorate, driven by an aggressive pricing push from

Procter & Gamble,

(PG) - Get Report

the owner of battery maker Duracell.

Of particular concern: Energizer's exposure to the slow-growth battery category limits the company's long-term growth potential. During the first quarter, Energizer's personal care organic sales increased 6.4% year-on-year, rebounding from the fourth quarter; which was impressive, especially given the company's lower marketing. Still, feminine care was weak falling 12%.

Still, despite Morgan Stanley's concerns about the company's battery risks, the analysts believe there could be potential revenue upside versus the consensus in fiscal 2010, given a strong innovation pipeline from Energizer, combined with a large, expected increase in marketing spending and potential improving macro conditions.

Some of the positive factors analysts see for the company include top-line upside, increased marketing that could drive organic sales upwards, growth that could be higher than consensus estimates, and a cheap valuation.

Experts on the consumer goods industry all seem to agree that

Procter & Gamble's

(PG) - Get Report

second-quarter earnings indicate that the coming third quarter should continue to show high growth. The positive performance in the second quarter has led to increasing confidence that management will be able to deliver in future quarters as well.

Bank of America

(BAC) - Get Report

analysts say that P&G checked "every box" in the second quarter and the results were a "well-rounded next step in P&G's progression." P&G delivered a big second quarter earnings per share surprise and raised its outlook enough to satisfy the market. Bank of America analysts particularly like P&G's strong organic sales growth, even more so given the company's suggestion that this growth is sustainable; P&G has indicated that it expects 4 to 6% growth in the third quarter.

John Faucher of

J.P. Morgan

(JPM) - Get Report

, for his part, expects the company to see market share improvement overseas, particularly in Central and Eastern Europe, the Middle East and Africa. "Overall, we found Procter's commentary on their innovation pipeline and dedication to invest in the business as promising," Faucher writes. "The company is clearly taking the right steps to regain lost share and this is already translating into better top-line performance."

Ferrara believes that P&G has the ability to restore healthy growth. Rather than use short-term promotional spending to boost growth, the company has already absorbed the near-term pain of lowering its fiscal 2010 growth targets, allowing it to focus on reinvesting moving forward. Although P&G's global market share was down in the second quarter year-on-year, management has indicated that it expects third quarter results to demonstrate that the company has truly turned the corner.


ratings team has a buy rating for P&G with a $70.47 price target.

-- Reported by Andrea Tse from New York


>>Tiger Woods' Sponsors Jumping Ship

>>Heinz's Second Quarter Profit Falls

>>J&J Nets $1.7 Billion Settlement

>>Can Johnson & Johnson Heal Itself?

>>U.S. Accuses J&J of Paying Kickbacks

>>J&J Recalls Stinky Products; Stock Slips

>>Johnson & Johnson Still Loved by TheStreet

>>Stifel Nicolaus: Buy Rating for Altria

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