Avoid This Food Stock, Consider These Instead...

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

With rising competition in the food marketing business, investors should be very careful about backing past winners. Some firms may reach saturation points and be open to downside that the market has failed to recognize based on past momentum. And since companies are valued based on the future, it is critical to see whether either share gains could be gained in new markets or stronger growth above GDP expansion could arise. Below, I review several food marketers with these perspectives in mind.

Why You Should Avoid General Mills (NYSE: GIS)

While General Mills carries multiple product categories, I believe the two that are most important to look at are yogurt and cereal. In the recent fiscal second quarter, management announced that Yoplait is decelerating amidst robust international momentum. Although the company has been gaining share in the high-growth Greek yogurt market, it has been late to the punch bowl and now faces more pressure than ever from competition. Prices are expected to compress between 25% and 30% next year alone. Agro Farma's Chobani brand has nearly half (47%) of the market, and Danone, a French brand, is right behind with a 20% share. The latter has increased capacity twice this year. PepsiCo has launched a popular Müller brand offering. All of this makes General Mills' "growth story" highly suspect.

With just 6% of the Greek yogurt market and a huge gap between its competitors, General Mills faces another problem: as competition rises, prices will fall. This means that the more General Mills tries to gain share (which it seems intent on doing), the more it will erode prices. And the more prices erode, the closer they get to the core middle-market Yoplait offering, which is already decelerating. In short, Greek yogurt sales could come to cannibalize Yoplait and leave investors without much of a growth story after all.

Then there are the cereal brands, which include Lucky Charms, Wheaties, Trix, and Total, among others. These products are under considerable pressure from not only higher input costs, but also private label competition. ConAgra (NYSE: CAG) recently bought out Ralcorp Holdings for $6.8 billion pending regulatory approval with the expressed purpose of introducing private label options. The deal, which is expected to close in March 2013, creates the biggest packaged market, becomes accretive in the first year, and generates $225 million in cost synergies by the fourth year. But most concerning for General Mills is that it bolsters ConAgra's cereal business substantially.

ConAgra, in general, is seeking to grow through acquisitions and will acquire more businesses to specifically increase private labels. At the same time, distribution channels are being opened at places like Costco and Whole Foods Market, possibly Wal-Mart and Kroger. These headwinds in the yogurt and cereal market make General Mills a stock to avoid, especially since it's near the 52-week high.

A Look At Kraft Foods (NASDAQ: KRFT)

Kraft trades at a premium 16.1x forward earnings multiple and has limited upside. In fact, the spin off of Mondelez (NASDAQ: MDLZ) separated out the core snack brands, leaving Kraft without much growth potential. On the other hand, Kraft is expected to be the safer of the two stocks with a 4.4% dividend yield and stable North American operations. Even if it grows EPS by the expected 6.3% rate over the next 5 years, this may very well be enough to outperform broader indices. Perhaps this is the reason why Warren Buffett recently added a position in the company to his portfolio.

The company is also evidently pruning the business with such plans like selling the Breakstone dairy unit for as much as $400 million. This will enable the company to focus more on its main offerings. I personally feel that Mondelez's focus on accretive growth and tacking on new businesses to then roll into new emerging markets represents an excellent strategy that will deter would-be Kraft investors. Mondelez is expected to grow EPS by 11.8% annually over the next 5 years and, as the economy improves, Kraft's "stability" will become less of a selling point.

Assuming Kraft meets expectations, 2016 EPS will come out to $3.40. At a multiple of 15x, this translates to a future stock value of $51. Discounting backwards by 10% yields a present value of $34.71. This does not provide a compelling return at this moment. However, a return on invested capital of 10.9% means the business is creating value. And further, it trades at only 1.5x book value versus 6.6x for peers, so there is upside from price multiple expansion.

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