Everyone Has to Eat Part 4: From Cereals to Snacks to Ice Cream
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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.
Eating cereal for breakfast is a tradition that is fading into the fast paced post modern lifestyle. In times past people would sit down with a bowl of Kellogg’s (NYSE: K) Corn Flakes or Rice Krispies or General Mill’s (NYSE: GIS) Cheerios. As the pace in life picks up for most people, cereals are giving way to snacks on the go for a quick start on their day. Like many other companies, these two companies are pushing into the emerging markets frontier as well.
Healthy Living
Consumers are becoming more health conscious. They want a healthier and faster start on the day. Cereal companies are responding in kind by producing snack bars and other food on the go products. General Mills has the Nature Valley granola bars and Yoplait. Kellogg’s has pop tarts and Eggo waffles. The highest growing segment for General Mills in the U.S. in 2011 was the Small Planet Food’s segment at 13% which was driven by Lärabar energy bars. The Big G segment, which include Cheerios brand cereals was down 2% last year. This is probably due to the fact that people favor snacks and health bars that don’t require prep time. The trend continues for the snacks and Small Planet Food’s segment for General Mills. U.S. Snacks was the second highest growing segment in the U.S. for Kellogg’s at 6% in 2011.
The Emerging Markets Frontier
Like groceries, cereals are experiencing a loss of prominence due to lifestyle changes and the fact that most people in the U.S. who are in the habit of buying cereals are already buying them. So, companies are diversifying their product lines and expanding into emerging markets. General Mills experienced significant gains overseas mostly due to the Yoplait acquisition. In 2011 General Mills’ 14% growth was driven by “Häagen-Dazs and Wanchai Ferry brands in China and atta flour in India.” People in the developing markets are just being introduced to cereal, health bars and ice cream, so the venture into the emerging markets frontier has just began.
Fundamentals
The total debt to equity ratio of General Mills (190%) is less than Kellogg’s (575%). Generals Mills p/e ratio of 17 is higher than Kellogg’s p/e ratio of 15. With that said General Mills might be worth watching for a better price because of less leverage. My personal threshold for total debt to equity is less than 85%.
Conclusion
All of the companies mentioned in my four part series are expanding overseas thus adding to political risk. For General Mills and Kellogg's as noted above there is also fundamental risk related to the high debt to equity ratios. I will not be investing in these companies without significant price corrections.
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