3 Food Companies for Your Watchlist
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Food manufacturers provide products needed during good times and bad. However, an investor who takes an ownership stake in a company without doing some research certainly represents a fool’s errand (note lowercase "F"). The three companies below represent some good ideas for your Motley Fool Watch List.
More than cereal
Food manufacturer General Mills (NYSE: GIS) makes many of your favorite cereals such as Cheerios, Lucky Charms, Trix, and Wheaties. In addition, General Mills makes soup, yogurt, flour, and more.
General Mills increased its revenue and free cash flow 7% and 35%, respectively, in FY 2013. Its return on equity clocked in at 26%. General Mills’ long-term debt to equity ratio is steep at 83% of stockholder’s equity; however, its operating income exceeded interest expense nine times. The general rule of thumb is at least five times interest expense.
Three trends provided fuel for top and bottom line growth for General Mills: international expansion, faster paced consumer, and the healthy lifestyle movement.
General Mills’ international segment grew 24% and now represents 29% of its overall revenue, up from 25% in FY 2012.
The 9% increase in its snack product line serves as evidence of consumer demand for food on the go.
General Mills’ organic food segment, “Small Planet Foods,” increased 32% last year and serves as evidence that people want to eat healthier as well.
As an icing on the cake, General Mills paid out 37% of its free cash flow in dividends last year. General Mills has boosted dividends steadily since 2004 and currently pays $1.52 per share per year, yielding 2.9% as of this writing.
The healthy lifestyle movement and international expansion should serve as catalysts for future top and bottom line growth for General Mills. Products such as Honey Nut Cheerios, Yoplait brands, Nature Valley Protein Bars, and Fiber One snack bars will lead the way in the future for this company. Moreover, look for the company’s “Small Planet Foods” segment to continue to grow.
On the international front, General Mills’ August 2012 acquisition of the Brazilian company Yoki gives it a strong foothold in the Latin American market. The Chinese economy also represents an excellent opportunity for the company as well.
Source: Wikimedia Commons
A turnaround in most of Campbell Soup’s segments contributed to revenue gains. So far in 2013, Campbell Soup has increased revenue 11%. However, its free cash flow has remained relatively even due to increased capital expenditures.
On the balance sheet, Campbell Soup’s cash represents 35% of stockholder’s equity. Campbell’s possesses quite a bit of debt, amounting to 224% of stockholder’s equity. However, Campbell Soup can still easily make its interest payments as operating income exceeds it by nine times.
So far this year, Campbell Soup has paid out 55% of its free cash flow in dividends. Currently, the company pays $1.16 per share, yielding 2.4%.
Sales in Campbell Soup’s U.S Beverage segment declined 5% due to a decline in its V8 line. Also, a decline in sales in its foodservice business due to the loss of a major customer served as weaknesses.
Campbell Soup’s CEO, Denise Morrison, wants to strengthen its “core portfolio” through new varieties of old products, new product innovation, and expansion via acquisition. Moreover, the company wants to capitalize on the healthy lifestyle trend and growth on the international scene.
For example, Campbell Soup plans to launch 200 new products in FY 2014. The company wants to launch a new home style soup, dinner sauce categories, as well as a V8 Harvest juice jointly developed by Campbell and its recently acquired Bolthouse Farm subsidiary.
Campbell Soup’s recent acquisitions include organic baby food and beverage company Plum Organics, which will allow the company to better capitalize on the increasing consumer demand for organic healthy food. Its acquisition of Kelsen Group A/S, “a producer of quality baked snacks” allows the company to take advantage of growing demand for sweet biscuits internationally.
One dark cloud on Campbell Soup’s horizon lies in the recently announced sale of Campbell’s European business. This represents a short-sighted move, considering the European economy should eventually recover, consequently leaving the company out in the cold in that market.
Source: Wikimedia Commons
For FY 2013, ConAgra’s revenue and free cash flow increased 16% and 34%, respectively. It possesses a decent balance sheet. Cash only makes up 3% of stockholder’s equity, and long-term debt to equity comes in at 166% of stockholder’s equity. Its operating income exceeds interest expense by five times. Return on equity clocks in at a respectable 14%.
ConAgra paid out 41% of its free cash flow in dividends last year. Currently, the stock yields 2.7% annually.
ConAgra’s acquisition of RalCorp increases its access to the private labeling market. Branded products may start to show increasing demand sensitivity to price increases as constant economic strain compels the consumer to buy private labels. If this trend accelerates, then ConAgra stands to benefit.
However, keep a close eye on possible future turbulence. Management expects significant impact from a major restaurant pulling its potato business away from its commercial foods segment. In addition, product recalls surrounding undeclared allergens serve as evidence of information risk.
Source: Wikimedia Commons
On the whole, product innovation, international expansion, and the healthy lifestyle movement will benefit these companies. In addition, they provide dividend income while you patiently wait for capital gains. They definitely warrant a place on your watch list and more research time.
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