3 Mid-Sized Food Producers to Analyze

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

The packaged-foods industry is presenting soft volume increases. Its outlook is rather stable, but not highly promising. However, not everything is lost. The U.S. and Western European food markets are relatively mature, but faster growth markets like China, India and LatAm present some opportunities. In addition, despite the fact that the industry is dominated by a few multinational corporations, there is still space for smaller, mid-sized businesses.

For this article, I will focus my analysis on three mid-sized food producers and investigate how they are doing in this context.

Growth by acquisition

TreeHouse Foods (NYSE: THS) manufactures and sells private-label products to grocery retailers and food-service distribution channels.

The company reported for its first-quarter 2013 an EPS of $0.74, excluding restructuring expenses related to the soup operations. Total sales at $540 million were mixed: -2% in volume, +0.5% in pricing, and +4.7% explained by the Naturally Fresh and Aseptic cheese acquisitions. Organic sales were down 1.4%.

TreeHouse just announced it has completed its $35-million acquisition of mayonnaise, dressings and sauces producer Cains Foods. This is not the only buyout made by the company, as it has already bought Aseptic cheese and Naturally Fresh last year. The strategic deal will reinforce Treehouse’s service to the retail grocery and food-service channels as well as enhance the company’s product portfolio.

In addition, there is a high probability of a large acquisition this year being made by TreeHouse, most likely in beverages. The recent changes in management support this thesis. Chief executive officer Sam Reed expressed he is confident that the company will make additions to the portfolio in the near term, and most likely one that is larger than $300 million.

However, TreeHouse presents volatility in its ordering patterns, and that makes it hard to analyze the company’s sustainability. Management indicated that quarterly swings in volume might become the norm going forward. But retailers, just like consumers, order on a month-to-month basis.

Dividend play

Lancaster Colony (NASDAQ: LANC) is a diversified manufacturer of consumer products that focuses primarily on specialty foods for the retail and food-service markets.

Despite reporting somewhat volatile earnings recently, the company presented good results for its last quarter. Net income increased 19.8% year-over-year to $21.8 million. Revenue grew slightly by 3.1% and EPS grew 19.4%. Fortunately for the company, the market expects better EPS for this year.

Margins are key for Lancaster. Over the trailing-12 months, gross margin is 22.8%, while operating margin is 14.1% and net margin is 9.4%. If food prices remain stable, the company should be in a position to maintain these positive levels.

Lancaster holds no debt and can easily cover short-term cash needs, which is a favorable sign. Plus, it is one of the only 16 American companies to have consistently increased regular cash dividends annually for 50-consecutive years. The company manages to provide returns for shareholders while retaining resources for future growth. Not bad at all.

On the right track

Hain Celestial (NASDAQ: HAIN) is a natural and organic-product manufacturer and distributor, which sells under its own brand names.

The company’s strategic investments and its continuous efforts to contain costs make its results very appealing. In fact, Hain posted good results regarding these issues for its third quarter:  the top line increased 21.4% and the bottom line improved 28.6%. Meanwhile, EPS surged 28.6% to $0.72 as well, proving Hain’s very good performance.

The key for Hain has been to get the company on the right track by integrating the acquired businesses, eliminating low-profit private-label brands and focusing on high-margin ones. We have to consider that acquisitions have been very important for the company lately in order to increase its market share. The deals allowed geographic expansion and cross-selling opportunities, increasing top line.

The acquisition of Ella’s Kitchen Group enabled Hain to start a complete baby-food division, with amazing prospects. Other recent brand acquisitions are: Hartley’s, Gale’s Robertson’s, Frank Cooper’s and Sun-Pat from Premier Foods. These additions will reinforce Hain’s position even more.

One last thing to consider about the company is its upbeat guidance. Management anticipates sales to surpass $1.7 billion for fiscal 2013, meaning a 26%-plus increase year-over-year. Earnings per share are projected to grow from 31% to 33% as well.

Conclusion

I normally agree with company expansion plans. In the case of TreeHouse, I must admit that the company is taking acquisitions rather seriously. However, until integration proves successful and sales grow, I would remain on the sidelines for this company.

Lancaster’s track record of consistently increasing dividends without abandoning investments make me think it is a good long-term investment.

Growing global demand for organic products makes Hain a company with a great outlook. It is well positioned to profit all across its business segments. Definitely, it is an interesting stock to buy.

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Louie Grint has no position in any stocks mentioned. The Motley Fool recommends Hain Celestial. The Motley Fool owns shares of Hain Celestial. 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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