Unilever Sell-Off Overdone?

Consumer-products giant Unilever plc (NYSE: UL) didn't impress investors last Thursday with its second-quarter earnings release. Most of the headlines read something like "Unilever reports 20% decline in second-quarter net profit," which on the surface makes it sound like the Anglo-Dutch giant is in trouble.

But I think the sell-off is looking a bit overdone. Digging into the numbers, it's clear there were some unusual items that skewed the results. Key among these unusual items are higher restructuring charges this year and an unusually low tax rate during the second quarter of last year. Moving up the P&L to exclude these effects, the company's second-quarter operating earnings look a lot like its first-quarter results -- up almost 2% in euros.

The analyst community also seems in a lather over quarterly case volume, which slipped by 0.5%. The company has clearly lost some momentum compared to its 2.3% volume growth in the first quarter, but keep in mind that all the consumer-products companies are raising prices to cover commodity cost increases. Combine that with a soft worldwide economy, and we shouldn't be surprised to see some case-volume slippage. Kraft (NYSE: KFT) just reported a 1% case-volume decline in the second quarter, and the stock soared.

I'm ready to take Unilever CFO Jim Lawrence at his word when he says case volume would have been flat except for an accounting issue last year, when some volume was accelerated into the second quarter from the third. For me, the key point is how effective the company can be at passing through price increases in the short term without hurting demand for its brands over the long term.

Unilever looks to be handling this balancing act reasonably well, with "underlying sales growth" of 6.8% for the quarter -- and in positive territory for all geographies. Foolish investors will get to see this week how volume is holding up at Unilever's largest worldwide competitor, when Procter & Gamble (NYSE: PG) reports quarterly results.

For now, I continue to be comfortable with the view that Unilever is a solid core portfolio holding that offers modest growth, a tasty 3.7% dividend yield, and international diversification.

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