Everyone Has to Eat Part 3: Groceries and the Emerging Market Frontier
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everyone has to eat and drink to survive. As an investor one has to ask, ”Can great investment gains be made from investing in the companies that make the items that nourish our body?” In this four part series I examine the investment viability of these companies.
As I was looking through my cupboard the other day I noticed a number of grocery items that are made by publicly traded companies. I noticed some jam made by J.M. Smucker Company (NYSE: SJM). I also noticed some mayonnaise made by Kraft Foods (NASDAQ: KRFT), Heinz (NYSE: HNZ) Ketchup, and Campbell Soup's (NYSE: CPB), well, soup. As I was looking through these products I wondered if these companies would make a good investment. After all, these iconic brands have to be in every home in America. People have to eat, so investment returns are assured. Right? One is well advised to do research on anything including companies that make iconic brands such as Smucker’s jelly.
More Than Just Jam
As I began to research the J.M. Smucker Company surprisingly I realized that coffee comprised the largest percentage of sales in 2011. This drove home the importance of research to me. Smucker’s has been buying various coffee companies in the past three years. They bought the Folgers brand from Proctor and Gamble in November of 2008. On May 16, 2011 Smucker’s bought Rowland coffee as well. As I studied this segment more closely I noticed a decline in volume and an increase in coffee sales that was due to price increases. Smucker’s decided to cut the price of coffee in 2012 because they realized that the increase in price was hurting the volume or number of units sold. Heinz also struggled in fiscal year 2012 with volume declines of 0.3%. This alerted me to the fact that even groceries can be sensitive to price.
I noticed a trend with the companies mentioned in this article that, like restaurants, sales in the emerging markets are becoming more prominent. I have many theories for this trend. A huge portion of the population is always on the go. They always either have to go to work, school or play. They don’t have time to cook, so they go to fast food restaurants and eat in a hurry. Also everyone who is going to buy these products i.e Kraft Cheese, Folgers Coffee, and Heinz Ketchup is already in the habit of doing so on a regular basis. One of the ways to increase revenue from this base is to raise prices and risk losing the customer to a cheaper store brand. Take a look at Campbell’s Soup business segments and you’ll see gains under every heading with global or international beside it. The only exception is their North America foodservice division. The same can be said about Heinz. Kraft foods has increased its sales in the United States, but its United States percentage of sales has declined from 60% in 2009 to about 45.8% in 2011.
In reaction to increased global demand and the fact that people are eating more on the go, Kraft has decided to split into two companies: Kraft will consist mainly of the North American grocery business and Mondelez International will be comprised of snacks, the European division and the developing market units. The company wants Mondelez to become a presence in the fast growing snacks division while also having a presence in the “highly attractive emerging markets.”
Icarus Can Fall
Just because a company has iconic brands in its portfolio and is made up of products essential to human sustenance does not necessarily mean that it can’t fall. Price increases can lead people to buy cheaper store brand products (myself included). Also, the push into emerging markets can be a two edged sword. It can take advantage of new and opening markets in the emerging economies; however, it can also expose companies to greater political risk. Investors should take heed to monitoring other types of risk. The fundamental risk of these companies is high because all except J.M. Smucker have a total debt to equity ratio above 85%. Smucker’s had a total debt to equity ratio of around 57% in 2011, which is quite impressive to me. Smucker’s exposure to emerging markets is limited but they are considering entry because they know that is where future opportunity lies. The P/E ratio of 18.77 is a little high so patience for a better price is warranted.
stockdissector has positions in Kraft mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend H.J. Heinz Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.