A "Snacky" affair
indar kumar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The top three food giants namely – General Mills (NYSE: GIS) , Kraft foods (NASDAQ: KRFT) and Kellogg (NYSE: K) have been struggling lately. They are under tremendous inflationary pressure also the competition between them is limiting pricing power. Having said that the sentiments for all these company on the Wall Street are positive.
General Mills have been quoted as a “buy” by analysts. Which is I think precise given the position of the company at present. It is only slightly undervalued It trades at 14.7x earnings versus Kellogg's 15.2x and Kraft's 18.7x. Net debt stands at 31.4% of market value. The CEO who recently gave a statement was of the view that he was happy with “resilient” sales in an inflationary environment. According to him, consumer trends are a tale of two worlds. Consumers are willing to buy branded snack products but are wary because of the high levels of unemployment and apprehension about the economy. But the high profile company has proved that it is strong enough to face such challenges. Its bakery and food services exceeded the anticipated value. Sales in foreign land soared upto 30% and YOPLAIT has achieved the status of an iconic Yogurt brand. It is dealing with Gross Margins of around 40%.
The fourth quarter results of Kraft foods missed the estimates by a narrow margin. Revenues had significantly gone down but were up when compared to the previous quarter. However inspite of such results Kraft foods has been listed as a “strong buy”. It will benefit from the separation. While Mondelez will handle the snacks part of the company, Kraft looks to venture into grocery’s business. The target price on Kraft currently stands at $49. It is estimated that it will reach there quickly after it hit the $45 mark. But this company too has its share of problems. The strengthening dollar is hurting the company’s sales abroad. The consumers are evaluating cheaper alternatives due to this very fact, though it has a dividend yield of 2.9% which is very attractive. But Kraft foods reported its 2013 earning guidance which was below consensus. but Mondelez is all set to grow with positive sentiments all around.
Kellogg has the highest gross margin among all the three food giants which stands at 42%. Presently it also gives the highest dividend yield to its investors. Experts analyze high ROIC growth for the company which trades at 15.2x earnings. Kellogg’s acquisition of Pringles had also made it the No.2 Snack brand worldwide. The company benefitted from this as the Snack’s market grew worldwide on a consistent basis. The problem with Kellog is that it is having serious supply chain issues. It has suffered blows in the past when it had to recall 28 million boxes of cereal due to stale odor. The company has invested heavily – about $70 million, in second half of 2011 to address this issue but it will still take time before the functioning smoothens. Analysts expect Kellogg to earn $3.48 a share this year, raising to $3.78 a share next year. This puts the company's forward P/E ratio at 13.49, vs. its industry's average of 16.29. Though Kellogg has increased dividend regularly since 1985, it is better to just hold the shares of it so as to reap profit from the Pringles deal in the near future.
We have seen that all three companies are giving good returns or will do so in the near future. The snack market is set to grow and so are these companies. It is wise to rake in shares of these companies and sell them when they meet their target price. The sentiments of Wall Street as mentioned too looks good on them, if you want to play it safe, these companies are a good bet.
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