Why A Medical Group's Decision Could Be Bullish For Snack Foods

BA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a controversial move, the American Medical Association, or AMA, voted on June 18 to classify obesity as a "disease."

I don't doubt that many AMA members have good intentions (others' motives are, perhaps, not so pure). However, I think the move is ill-advised.

Investment implications: the law of unintended consequences

When there's a major policy change -- either governmental or influential industry group -- there are usually investment implications. It's possible this classification will result in additional obesity-related treatments being covered by some medical plans. I think it's too early to predict which medical industry (I include weight management programs in this broad classification) companies could benefit. So, let's table that angle. However, I do think there's an unlikely group that will get an added boost from the AMA decision.

This is a nuanced opinion, so consider carefully. Unfortunately, I think the AMA's decision will turn out to be a classic example of "the law of unintended consequences," in that it will likely increase the obesity rate. The best that can be hoped for, in my opinion, is that it has no effect.

Carte blanche labeling obesity as a disease can easily cause a sense of helplessness ("It's a disease, so I need a 'medical cure' -- procedure and/or pill"). It will be less viewed by some (those who are and aren't overweight) as a lifestyle (diet, exercise) issue. So, with that link or correlation weakened, the thought for some will be: why eat better? It's futile. 

Sweets, snacks & processed foods are here to stay

For this reason I think the AMA decision is bullish -- or at least not bearish -- for the plethora of companies that produce and/or serve "non-whole foods." 

There are countless companies that fall into my very broad category, but I'll focus on "processed and packaged foods" category. Here are a few that look attractive:

<table> <thead> <tr><th>Company</th><th>Fwd P/E</th><th>PEG</th><th>EPS growth this yr (%)</th><th>EPS growth next yr (%)</th><th>EPS growth next 5 yrs (%)   </th><th>ROE (%)</th><th>LT D/E</th><th>Profit Margin (%)</th></tr> </thead> <tbody> <tr> <td><strong>Snyder's-Lance</strong> <span data-id="204341"><span class="ticker" data-id="204341">(NASDAQ: <a href="http://caps.fool.com/Ticker/LNCE.aspx">LNCE</a>)</span></span></td> <td>19.8</td> <td><strong>1.7</strong></td> <td><strong>51.8</strong></td> <td><strong>16.9</strong></td> <td><strong>18.2</strong></td> <td>7.4</td> <td>0.6</td> <td>3.9</td> </tr> <tr> <td><strong>J.M. Smucker</strong> <span data-id="205430"><span class="ticker" data-id="205430">(NYSE: <a href="http://caps.fool.com/Ticker/SJM.aspx">SJM</a>)</span></span></td> <td>16.4</td> <td>2.7</td> <td>23,2</td> <td>8.6</td> <td>7.8</td> <td>10.4 </td> <td>0.4</td> <td><strong>9.2</strong></td> </tr> <tr> <td><strong>B&G Foods</strong> <span data-id="215227"><span class="ticker" data-id="215227">(NYSE: <a href="http://caps.fool.com/Ticker/BGS.aspx">BGS</a>)</span></span></td> <td>19.1</td> <td>2.0</td> <td>15.4</td> <td>14.5</td> <td>14.0</td> <td>20.5</td> <td>1.6 </td> <td><strong>9.6 </strong></td> </tr> <tr> <td><strong>Flowers Foods</strong> <span data-id="203595"><span class="ticker" data-id="203595">(NYSE: <a href="http://caps.fool.com/Ticker/FLO.aspx">FLO</a>)</span></span></td> <td>20.3</td> <td><strong>1.7</strong></td> <td>10.0</td> <td>12.2</td> <td>12.7</td> <td><strong>24.3</strong></td> <td>0.6</td> <td>6.4</td> </tr> <tr> <td><strong>Advantage</strong></td> <td>--</td> <td><strong>Snyder's; Flowers</strong></td> <td><strong>Snyder's</strong></td> <td><strong>Snyder's</strong></td> <td><strong>Snyder's</strong></td> <td><strong>Flowers</strong></td> <td><strong>Smucker</strong></td> <td><strong>Smucker; B&G</strong></td> </tr> </tbody> </table>

Source: Finviz; LT D/E is long-term debt/equity. Data to June 28.

I want to be clear -- I'm NOT suggesting these companies are comparable on any healthful or non-healthful food scale. It's a mixed group. Additionally, most have mixed offerings themselves. 

Snyder's-Lance

Snyder’s-Lance produces and sells snack foods primarily in the U.S.  Its products include pretzels, potato chips, tortilla chips, nuts, sandwich crackers, pretzel crackers, cookies, etc. Its major brands include Snyder’s of Hanover, Lance, Cape Cod, Archway, and Stella D’oro. The company was formed when Lance merged with Snyder's in 2010. 

What's not to like about Snyder's EPS number and projected numbers? I'd like to see its ROE get larger, and its profit margin a bit fatter. However, all things considered, it looks moderately attractive, making it at least a good watch list candidate.  

J.M. Smucker

This is an old family-owned business. It produces and sells coffee, fruit spreads, peanut butter, oils, baking mixes, beverages, frozen sandwiches, dessert toppings, etc. Its brands include Smucker's, Jif, Folgers, Millstone, Crisco, Pillsbury, Hungry Jack, and many others. 

Its focus on coffee, peanut butter, and jams and jellies has been a winning strategy -- and should continue to be one. It has "high quality" (consistent) earnings, a nice profit margin (9.2%), and pays a 2.1% dividend. Not surprisingly, investors will pay up for these qualities; the company's PEG of 2.7 is the highest among the group. 

B&G Foods

B&G produces and sells shelf-stable foods in the U.S., Canada, and Puerto Rico. It offers Mexican food (taco shells, salsas, etc.), syrups, salad dressings, pancake mixes, various organic products, hot cereals, fruit spreads, meat spreads, flavor enhancers, various sauces, cooking sprays, whole and crushed tomatoes, canned beans, sugar substitutes, vinegars and cooking wines, molasses, among other products.

It distributes its products to various retail outlets, wholesalers, food service companies, etc. 

EPS projections are solid, and its 9.6% profit margin is strong for its industry. The company is known for its acquisition prowess. Its ROE is high, but that's due to being levered-up with debt. While the debt load is high for my liking, given the other metrics, it's not high enough to be a deal-breaker.

Flowers Foods

Flowers produces and sells bakery products in the U.S. Its direct-store-delivery segment produces fresh bakery foods, such as breads, rolls, tortillas, and snack cakes. The company's brands include Flowers Foods, Nature’s Own, Tastykake, and many others. Products are delivered to retailers and food service companies on the East Coast, in the Southwest, and to select markets in California and Nevada. Its warehouse delivery segment produces snack cakes, breads, rolls, and frozen breads for national retail, food service, and vending customers. This segment has various brands. 

The company's 24.3% ROE indicates it's very efficient at generating profits from investors' money. Relative to others in the food industry, it's reasonably valued on a PEG basis -- its 1.7 PEG is tied for the lowest among this group.

Takeaway

Many Americans are drawn toward sugary, salty, and/or "convenience" (processed) foods. The AMA's classification of obesity as a disease will do nothing to stem the trend among (some) people of consuming foods in these categories, in my opinion. 

As to the highlighted stocks, a basic analysis indicates they have potential as solid investments. However, investors need to do additional research. Flowers appears the most attractive given its great ROE, relatively reasonable valuation, and lack of any notable negatives. 

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BA McKenna has no position in any stocks mentioned. The Motley Fool recommends Flowers Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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