Unilever Munches on Cheesy Profits

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Consumer products giant Unilever plc (NYSE: UL) reported a whopping 39% increase in earnings per share, to $0.68 for the first quarter of 2008. But before you get too excited about the results, it pays to dig a little deeper.

Turns out a significant portion of the bottom-line improvement came from selling the Boursin Cheese business, along with an extension of a joint venture between its Lipton Tea Brand and Pepsi (NYSE: PEP).

Still, volume growth continued displaying the momentum we have seen in recent quarters. Underlying sales were up 7.2% (adjusted for acquisitions, divestitures, and currency effects), representing a fifth consecutive quarter of posting organic sales growth greater than 5%. The company was able to pass along price increases equivalent to 4.8%, which gave a boost to the top line, and also helped offset commodity cost headwinds that continue to challenge competitors like Kraft Foods (NYSE: KFT), Kellogg (NYSE: K), and General Mills (NYSE: GIS).

Despite the challenging cost environment, Unilever managed to grow operating margins by 30 basis points (stripping out the one-time effects), using a combination of price increases and some expense leverage.

Unilever is in the midst of a multiyear effort to transform the company into a faster growth engine -- with a focus on developing markets, higher potential product categories like personal care, and creating a leaner operating structure.

I continue to admire the progress management is making. It's not an easy task to drive change in a company that's been in business for more than 120 years, but Unilever is making steady strides toward the world-class results of Procter & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL).

While Unilever's valuation may look a little high compared to those best-in-class competitors, I don't see a lot of downside here. The company is delivering solid growth, along with a 2% dividend yield. And as long as the U.S. dollar remains weak compared to the euro, investors in Unilever could continue to benefit.

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