3 Food Stocks For A Good Appetite!

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

2012 was the year of M&A for the US food sector, as it witnessed much higher volume of M&A transactions. Kellogg buying Pringles, Nestle's deal with Pfizer, ConAgra's acquisition of Ralcorp, were some of the major deals of 2012. This took my focus on to the packaged food industry where the companies are facing pressure from rising commodity prices and high competition. As the industry is already in its mature stage, the growth options are also limited. In such a scenario, product innovation is the key to retain the competitive edge in the industry. The next logical option available with the companies was to achieve cost synergy via M&A deals. Therefore all the major companies resorted to M&A deals for enhancing their portfolios. In my article today, I have picked up three stocks from the food industry which market packaged food products worldwide. Let's talk about these stocks in detail.

<table> <tbody> <tr> <td> <p><strong>Companies</strong></p> </td> <td> <p><strong>Qtrly Revenue Growth (Y/Y)</strong></p> </td> <td> <p><strong>Operating Margin (ttm)</strong></p> </td> </tr> <tr> <td> <p><strong>Kellogg</strong> <span class="ticker" data-id="204153">(NYSE: <a href="http://caps.fool.com/Ticker/K.aspx">K</a>)</span></p> </td> <td> <p>12%</p> </td> <td> <p>14%</p> </td> </tr> <tr> <td> <p><strong>Mondelez</strong> <span class="ticker" data-id="273672">(NASDAQ: <a href="http://caps.fool.com/Ticker/MDLZ.aspx">MDLZ</a>)</span></p> </td> <td> <p>-2%</p> </td> <td> <p>14%</p> </td> </tr> <tr> <td> <p><strong>ConAgra</strong> <span class="ticker" data-id="203032">(NYSE: <a href="http://caps.fool.com/Ticker/CAG.aspx">CAG</a>)</span></p> </td> <td> <p>7%</p> </td> <td> <p>8%</p> </td> </tr> </tbody> </table>

Source: Yahoo Finance 

ConAgra Foods in the last 8-9 years is in a process of transforming its business into a branded goods business rather than just a food company. Along with the branded operations, the company is also expanding its footprints into private-label segment. Recently, the company sealed a huge deal to buy Ralcorp Holdings that provides food products under various brands. Ralcorp is a leading maker of private labels in cereals, pasta, crackers, jams and jellies, syrups etc. where ConAgra lacks share. The main motive for ConAgra behind this deal was to establish its presence in the private label business which has shown higher sales growth than the branded food. After this acquisition for ~$5 billion in cash, ConAgra is set to venture into the private label packaged food business in North America. The deal is expected to close by March 31, 2013 and the combination of both the companies will generate ~$18 billion in annual sales. I see a huge opportunity out of this deal as private-label products are growing at twice the rate of that of the popular brands and contribute ~18% to the total packaged food market. ConAgra also expects to achieve a cost synergy of ~$225 million annually in the future. 

Apart from acquisitions, the company has announced a five-year plan to focus more on its international growth which currently accounts for only ~10% of its total sales. Under this plan, it is aiming to expand its presence in high-growth markets especially in India via more investment on acquisitions. Last year, it increased its stake in the Indian firm Agro Tech and became a majority owner with ~50% shares. We can see further such initiatives by this company in India which is a key part of its strategic plan. This plan is targeting at achieving ~6-8% growth in EPS over the long term. 

Mondelez International emerged after the spin-off of Kraft Foods Group to highlight its faster growing global snack food business. The company's real strength is in its billion dollar brands such as Cadbury, Trident, Oreo, Nabisco, Tang Jacobs Coffee, etc. which gives it a competitive advantage. To further enhance its portfolio, Mondelez undertook its first acquisition of Vitasnella from Danone and would retain the range of low-fat biscuits, snacks and bread products. Vitasnella is known for its low-fat products and this deal is a great boost to Mondelez's business which had a minimal presence in this segment. As more and more customers are shifting towards adopting healthy lifestyles, the low-fat snack is a huge opportunity for the food companies.

Mondelez generates 44% of its revenue from the developing markets and is further aiming at increasing this share in the future. Under this plan, the company recently announced its investment of ~$400 million in cocoa production in India, Ghana, Ivory Coast and the Dominican Republic over next ten years. Mondelez will work with the cocoa producers in these countries to secure better availability of its main ingredient in chocolates and further improving its supplies. I feel this move would benefit the company by increasing its revenue in the emerging markets. 

My favorite among the acquisitions during 2012 in the US food sector was Kellogg's acquisition of Pringles. The ~$2.7 billion deal was closed in early 2012, and the company has already started to realize its benefits. Kellogg is expected to achieve ~$15-20 million of cost synergy in 2012 and further ~$50-70 million in 2013 which is much ahead of its schedule. This is a result of the integration of IT as well as manufacturing processes by both the brands. This acquisition has expanded Kellogg's international snack business by three times and I expect a sales growth of ~5% coming from Pringles in 2013. Along with this, the company will also see the benefits of its JV with Wilmar International in 2013. China is expected to become the largest food and beverage market in the next five years and via this JV, Kellogg is all set to expand into that market. The JV will be operational in 1Q13 and would provide an excellent platform to the company to market its cereal and snack range in China. 

Other than acquisitions, Kellogg recently introduced various new products under its breakfast segment. It includes Mini-Wheats Crunch, Kellogg’ Scooby Doo cereal, Special K Chocolately Strawberry cereal, Kellogg’s Brown Sugar Cinnamon Jacks, and Pop-Tarts Oatmeal Delights. This was a strategic move by the company to sustain its breakfast leadership by introducing new products. These are healthy options offered in new flavors to target the rising number of health conscious customers. This will definitely provide support to the company's sales of breakfast snacks.

With the exploding global population and growing middle class, the emerging markets would be a strong opportunity in front of these food companies. I believe the companies are on the right track with their focus on acquisitions and product innovations. All these three stocks also have a decent forward dividend yield (K – 3.1%, MDLZ – 2%, CAG – 3.3%) which makes them an attractive option for the shareholders. Looking at their strategies for the future growth, I recommend buying these stocks.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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