Food-Producer Stocks for Your Portfolio

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

A look at some of the major domestic processed and wholesale food-distribution companies finds businesses that appear to be taking initiatives in boosting their profits. The historically counter-cyclical industry may hit some bumps in the road during the near term as the economy improves. Still, their long-term strategies ought to support growth, and thus share-price appreciation.

The following overviews and recommendations are primarily of firms that offer a range of food products, as opposed to focusing on one item. 

Former Kraft owner poised to grow as snack business

On Oct. 1, 2012, Mondelez International (NASDAQ: MDLZ) completed the spin-off of Kraft Foods, and the still-giant conglomerate is about two-thirds the size it would have been if it retained Kraft. Its four key operating segments are as follows:

1. Biscuits (cookies and crackers), delivering 27% of 2012 revenue

2. Chocolate, contributing another 27%

3. Gum and candy, 15%

4. Coffee, 11%

Mondelez is one company in this group that has realized increased sales and earnings per share through the first six months of this year. In fact, on a slight revenue gain, per-share earnings climbed a solid 43%, to $0.66, year-over-year.

I believe that this upturn was driven by acquisitions and divestitures that have served to optimize the performance of its various operating divisions. For instance, earlier this year, it bought out a biscuit operation in Morocco, while selling businesses in Turkey and South Africa.

Further such actions, facilitated by a relatively liquid balance sheet (the current ratio and long-term-debt to-equity about match the broader sector), ought to provide the basis for long-term margin and earnings improvements. At this juncture, Mondelez International's five-year average gross margins are just above industry norms.

In all, Mondelez shares, trading at a forward P/E of 18.5, offer three- to five-year price upside.

This recent IPO is highlighted by strong brands

Pinnacle Foods (NYSE: PF) launched its initial public offering in March. Its three operating divisions are:

1. Birds Eye Frozen distributes frozen vegetables, as well as owning numerous top food makers in other categories. Examples consist of Van de Kamp's and Mrs. Paul's (frozen seafood), Celeste (frozen pizza), Hungry Man and Aunt Jemima (frozen dinners and breakfasts). This unit contributed 43% of June-quarter sales.

2. Duncan Hines Grocery is famous for baking mixes and frostings, while also owning the likes of Vlasic (pickles), Mrs. Butterworth and Log Cabin (syrups), as well as several canned meat (i.e. Armour), pie and pastry fillings (i.e. Comstock), barbecue sauces (Open Pit), and salad dressing (Bernstein's) brands. Divisional sales were 42% of the June-quarter total.

3. The specialty foods segment carries snack products under the names Tim's Cascade and Snyder of Berlin. About 15% of sales were derived from these brands.

Pinnacle is making strides in lifting its gross margin through a higher-profit mix of offerings. Moreover, in a sign that it is aiming to broaden its product lines further and enhance long-term growth prospects, it has just agreed to acquire the Wish Bone salad dressing business from Unilever.

Overall, Pinnacle offers the likelihood of profit gains when the industry environment rebounds. Plus, the shares, trading at a forward P/E of 15.8, yield a solid 2.7% annually.

Higher-end and trendy beverage-based company

WhiteWave Foods (NYSE: WWAV) is divided amongst four product categories:

1. North America coffee creamers and beverages contributed 36% of 2012 net sales.

2. North America plant-based foods and beverages delivered 24% of the total.

3. North America premium dairy contributed another 24%.

4. Europe plant-based foods and beverages added 16% to the total.

Its brand names include Silk, International Delight, Horizon Organic, Land O Lakes, Alpro, and Provamel.

The appeal here is in the company's revenue growth trends (double-digit percentage to be precise) in the June quarter, at 10%. Across the board volume gains are driving margin enhancements.

My initial outlook is that share earnings will continue to climb at a nice rate, while these products, such as almond milk and organic dairy offerings, become more mainstream.

Thus, the long-term prospects for WhiteWave Foods are solid. Its shares, near their all-time high at a forward P/E of 23.6, are a worthwhile growth investment. Cash will probably be utilized for expansion measures, as there is no plan to pay a dividend.

Canadian baker an investor favorite

Canada Bread operates two segments:

1. Fresh bakery comprises the bulk of revenue, at 68% of the June-quarter total. It produces a variety of bread-related products, under the brand names, Dempster's and Olivieri, along with regional brands.

2. Frozen bakery produces par-baked bakery products, specialty and artisan breads. Brand names include Tenderflake and New York Bakery.

Canada Bread has been producing steady revenue and income. June-quarter share earnings were $1.07 versus $1.06 in the prior year.

I believe the company will eventually thrive is through the investment of its cash and available liquidity. Specifically, it had, as of June 30, $145 million in cash and only minimal long-term debt.

Canada Bread's results may well gain regardless of where it chooses to expand. It is a worthwhile selection, at a forward P/E of 16.7, for long-term total return. It does pay a dividend yield of about 3.4%.

Where to Invest

Many long-term focused investors might well be enticed by the recently created shares of Mondelez and Pinnacle. Their strong, well-known product lines ought to support solid results over the years, and their management teams seem to be taking the correct initiatives.

Elsewhere, if you are looking to capitalize on an industry growth category, WhiteWave Foods shares may be a favorable choice for your portfolio. Finally, as for Canada Bread, there is opportunity for better-than-anticipated profit upside, given the company's ability to expand.

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