Food Marketer Stock Roundup: The Good & The Bad

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

If you are looking to invest in food marketers, there are several variables to consider: (1) geographical strategy, (2) multiples, (3) dividend yields, and (4) strategic alternatives, which include acquisitions, sales, and spin-offs. In my view, the best companies to invest in are that are stable in existing geographies but have strong room to expand in emerging markets. Even if they are overvalued, this combination of stability and potential will prevent multiples from contracting and keep investors focused on growth. Below, I review 3 food companies with this in mind.

Dean Foods (NYSE: DF) Vs. ConAgra (NYSE: CAG)

Dean Foods is a food and beverage marketer in the United States and Europe. Its products--such as Barber's, Brown's Dairy, Land Lakes, Robinson Dairy--are somewhat recognizable, but lack the kitchen universality of other brand marketers. By contrast, ConAgra products can be found in nearly all American householder kitchens: Reddi-wip, PAM, Chef Boyardee, DAVID sunflower seeds, Hunt's, Peter Pan peanut butter, Hebrew National, Swiss Miss, among others. While ConAgra has clearly achieved more success to date, companies are valued based on the future. So, what are the outlooks for these two firms?

Dean Foods trades at 13.5x forward earnings and generated nearly $300 million in free cash flow the TTM ending 3Q12, which represents a yield of 9.5%. Earlier this month, Dean's decided to sell its Morningstar Foods business for $1.5 billion, and it will use the cash to pay off debt. This transaction is particularly impressive, since it came out at the high-end of expectations and 50% above the minimum expected. However, the stock has more or less gone nowhere since it was announced. Goldman Sachs recently upgraded the company to a "buy" with a $22 price target partly under the expectation that this would drive value. It is also important to bear in mind that Dean Foods is the majority owner of dairy company WhiteWave Foods (NYSE: WWAV), which recently IPO'd on the NYSE. If the firm's growth proceeds as planned, it will be valued at around 11x forward earnings at a time when the dairy industry is taking off relative to the wider food sector. Stifel Nicolaus recently upgrade the stock to a "buy."

ConAgra is a more "brand" name company and provides strong support with a 3.4% dividend yield. At 13.4x forward earnings, the company is also priced reasonably--its 19.7x PE multiple is slightly below the 20.4x industry average. 6.8% annual EPS growth is forecasted over the next 5 years. So, if multiples go nowhere, this means an annual return of 10.2%--terrific when you consider the minimal risk involved (ie. a beta of 0.7). However, the majority of analysts believe the stock is no more than a "hold," and this pessimism is reinforced by a poor 7.8% return on invested capital and a poor 3.3% EPS growth rate during the past half decade. I believe the return is strong enough to justify an investment now.

Mondelez International (NASDAQ: MDLZ) Overvalued But Attractive

Given the unsuspecting name, it is ironic that this Kraft Foods spin off retains the old company's strong international brands: Wheat Thins, Oreo, Ritz, Trident, Newtons, Cadbury, and Trident, among many, many others. But at only 16.4x past earnings for a 11.8% annual EPS growth rate, the company is somewhat expensive. Assuming expectations are met, 2016 EPS will come out to $2.21. At a multiple of 15x, this translates to a future stock value of $33.15. Discounting backwards by 10% yields a present value of $20.58--indicating the firm is around 20% overvalued. So, will investors ignore this premium?

Of the 22 reporting analysts, 17 initiated with a "buy" or better, and the others said "hold.' Goldman Sachs has put the company on its "conviction buy" list and set the price target at $32. The optimism stems from the potential to take brands that have succeeded in the United States and use them to penetrate markets abroad. If that fails, the company has another strategy: takeovers.  The CEO is looking to buyout companies in emerging markets, and then move them from one market to the next. In my view, the company is worthwhile buying shares in, because I see investors shifting to it after the appeal for "safe" returns from Kraft Foods wanes in a full recovery.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Dean Foods 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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