3 Appetizing Food Companies for Return Hungry Investors

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

Confined to an industry that is famous for its low margins, most food companies are seen as "recession proof holdings", or slow growing behemoths with little chance of bringing large returns to investors.  Often heavily indebted, these food stocks rely on their wide moat to raise cash for debt payments or to make acquisitions.  Their straightforward "people need food and we sell it" mantra must certainly leave a few investors on the sidelines from their boredness alone.  Oftentimes however, it is simple concepts like these that make the best investments, and I believe that is the case for the following three food companies.

A Familiar Face in a New Place

With Hormel's (NYSE: HRL) recent acquisition of Skippy peanut butter from Unilever for $700 million, they continue to add to their arsenal of brands, which already include Dinty Moore, Jenny-O, Valley Fresh, and perhaps most famously, SPAM.  By adding Skippy, Hormel has shown its desire to expand its global footprint and increase its overall shelfspace simultaneously.  Being the #1 peanut butter brand in China, Hormel hopes to leverage Skippy's success by pipelining SPAM and many other products into China via its newly acquired product. 

Despite representing only 10-15% of Skippy's overall revenues, China offers a promising growth runway as they look to boost international revenues, not only through Skippy, but throughout the whole company.  With SPAM's revenues doubling internationally over the last 5 years, the move could propel further growth plans for the company.  Expecting $0.13 to $0.17 to be added to their bottom line by 2014, they plan to realize direct EPS growth of 7-10% and even higher indirect growth thanks in part to its new plant in China.  

Less Really is More

Meanwhile, at Dole Foods (NYSE: DOLE), the story is almost the exact opposite of Hormel, as they recently unloaded their non-core Asian fresh food and global packaged goods businesses to Itochu.  Pending final approval for the deal, Dole would receive $1.685 billion in return, which is slightly more than the size of the company's Long-term Debt.  By greatly improving its Debt-Equity ratio and drastically simplifying its business by going back to its fresh fruit and vegetable operations, Dole is hoping for a brighter, debt free future.  

Despite its newly redesigned business concept, initial results have not quite been what investors were hoping for.  After guiding net income down to $45-60 million due to challenges in the fresh fruit market, Dole watched as traders sent the stock down to the tune of 13% overnight.  However, with cost savings of $50 million expected by the end of 2013 and a number of quality assets remaining on its balance sheets, Dole's Price/Book of almost exactly 1 leaves investors the opportunity to buy a quality business at a fair price.

An All Natural Growth Story

United Natural Foods (NASDAQ: UNFI) may not be a household name yet, but it is the dominant organic and natural food wholesaler in America and Canada.  Despite being largely unknown, UNFI's biggest customer, Whole Foods (NASDAQ: WFM), is rapidly becoming a household name as it continues its incredible growth trajectory in the U.S.  Fueled by acquisitions and its partnership with Whole Foods UNFI has grown its revenues from $1.4 Billion in 2003 to $5.4 Billion in the Trailing Twelve Months.  

Through further Canadian growth, potential international growth, and future acquisitions of regional distributors, UNFI has a truly amazing growth runway ahead of it.  As they try to corner a larger portion of the natural and organic food market, UNFI's tremendous distribution system willl continue to create synergies across its rapidly expanding network.  

The Foolish Bottom Line

While all three stocks are on my CAPS Watchlist, I am ready to give two of them a green thumb immediately, and they are Dole Foods and United Natural Foods.  With the combination of its 10% selloff in the recent month and that fact that its Book Value Per Share is only $10.14, I can't help but see Dole as a true value play.  Holding a Graham Number of $13.30, Dole's current price sees 30% upside potential, as it is priced almost exactly at its current Book Value.  By reaching its agreement with Itochu and hopefully unloading most of its debt, Dole has made itself a much more appealing acquisition target.  

As for United Natural Foods, I love their growth history, despite it being acquisition based.  By snapping up local and regional distributors, they have greatly expanded their network and started creating previously unrealized synergies.  Furthermore, with a PE of 26, I see UNFI as a cheaper way to play the growth story at Whole Foods, whose PE is a bit higher at 35.  With 36% of its Revenues coming from Whole Foods, and a new contract signed through 2020, UNFI should follow its largest customer's footprints as they boost their EPS for years to come.

Finally, with Hormel, I would simply like to see where its stock price settles in, since its price has spiked upwards over 10% on the news of its Skippy acquisition.  While its PE of 18 isn't awfully high, it does trade above the industry's average and its own 5 year average, which are both at 16.  While their acquisition provides a brighter future, I'm looking for a decrease in stock price or promising initial results from China before I feel comfortable jumping in on this one.

joryko has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. 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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