3 Food Stocks to Consider Buying

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

While I am largely reserved on the food sector, there are some stocks there that are consistent growers and ideal for passive investors. Some are overly expensive as a result of investor flight to safety during the recession; others have understated growth potential that will fuel value creation.

ConAgra Foods (NYSE: CAG) Not Worth The Price Tag

This food packager is fairly reasonably priced, at a respective 18.9x and 13x past and forward earnings. With a dividend yield of 3.5% and a strong brand, I find the stock relatively safe. Adding to that point is management's reaffirmation of 2013 EPS guidance.

ConAgra reported excellent first quarter results, marking the fourth time in a row that the company has recorded beating estimates. Higher prices and volume in the Commercial segment helped drive top-line growth to 6.7%. Going forward, management is looking to expand its plant in Russellville, AR, which will further increase margins by spreading out fixed costs.

There are several factors, however, that make me concerned about the future of this company.

For one, the firm has failed to meaningfully pay off long-term debt. The quick ratio is only 0.5x, which indicates that assets are heavily tied into inventories. Poor growth of 3.3% annually over the last 5 years also makes me reserved about the next 5 years.

Mondelez (NASDAQ: MDLZ) & General Mills (NYSE: GIS): Both "Buys" For Different Reason

Early this month, Kraft Foods Group spun off its domestic grocery business as "Kraft Foods," while retaining the more popular snack businesses in "Mondelez International". The latter contains favorite brands like Trident, Ritz, Wheat Thins, Nilla, and Cadbury, among several others. Since the transaction, Kraft has outperformed its sister company by nearly 500 bps with a return of 3.4%.

I, however, continue to be bullish on a market reversal in Mondelez's favor. Emerging markets are estimated to represent half of the business in 3 years. Although there will be FX headwinds from this international exposure, top-line momentum of 6% growth is fairly weak and badly in need of a long-term "high-growth" context. If you look at places like India, where the snack industry is forecast for upwards of 20% growth, you can understand why international marketing is the way to go.

Furthermore, Mondelez has also made appropriate decisions in managing its product portfolio. For example, eliminating the dairy business helped boost the outlook on margins, since that market is very vulnerable to intense competition. If you are looking for even more safety, however, General Mills is an attractive pick. Over the last 5 years, it earned investors a 38.5% (without even factoring in the 3.3% dividend yield) return during a challenging macro period.

General Mills currently trades at a respective 15.7x and 13.8x past and forward earnings. It is forecasted for 7.7% annual EPS growth over the next 5 years, which is much too pessimistic in light of the fact that growth of 8.2% was achieved during the past 5 years. While earnings have been on and off, with 2 misses in the last 5 quarters, I am still bullish on the long-term. Management's plan to cut sugar content in cereals will also appeal to a market that has become increasingly concerned about obesity.


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