Bullish on the Economy? Consider Buying These Food Stocks
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If you are optimistic on the long-term prospects of the broader economy, it makes sense to back non-cyclical consumer goods. In particular, if you wanted to just track the broader economy while benefiting from low taxable turnover in a "buy-and-hold" strategy, Kraft, General Mills, and ConAgra represent possible picks. As leading food marketers, they all carry strong brand names that are likely to grow alongside economic gains. Below, I review my outlook on all three.
Kraft Foods (NASDAQ: KRFT): A Safe and Easy Buy
"Anything Dressing" is the latest marketing mantra of Kraft Foods, which is betting its hopes on increasing sales by luring consumers to use its dressing in a whole range of dishes as a dip, a marinade, a spread, or even a glaze. The company estimates that consumption from dishes other than salads has jumped from 10% a decade ago to 20% now. The market segment ‘salad dressing’ offers a steady source of earnings for this food giant even though the growth is limited. SymphinyIRI, a Chicago-based marketing firm, estimated the company’s revenues from this segment through outlets other than Wal-Mart to be $1.52 billion during 2011-12, which represents a 5% increase when compared with five years ago.
Here are some reasons as to why I am bullish on Kraft Foods:
- The growth during the last five years has been maintained at a decent average level of 8.85%. This comes on top of a strong 4.3% dividend yield.
- Innovative marketing (for instance “anything dressing”) has boosted sentiments over sales growth expected, which will provide upward stock pressure. 3Q12 EPS of $0.79 also came out ahead of expectations by 10 cents
- Cash flows are strong at $2.7 billion in FY2012.
With these factors in play, I believe investors will remain focused on the upside. Warren Buffett's stake in the company further reinforces its perception as a value play in the food marketing segment.
General Mills (NYSE: GIS): Buy Despite Challenges
In spite of having perennially favorite brands from Cheerios to Betty Crocker, General Mills has fared badly in the recent past, trailing behind the S&P 500. But I do not think this stock deserves to be written off, since momentum has come out ahead of expectations, something that the market has failed to appreciate. The last three quarters all beat consensus estimates and did so by an average of 6.3%.
Even though Yoplait had underperformed in the US market, Yoplait Greek yogurt represents a meaningful catalyst. Struggles in the US market are also largely due to recessionary trends that will be offset by increasing relative exposure abroad. During the last year, it witnessed a 51% increase in the European market and a 20% rise in the Asia/Pacific region respectively. Equipped with an already strong portfolio and global distribution platform, General Mills may consider acquiring new brands to sell to its wide customer base. But bear in mind that General Mills will have to take on considerable debt to achieve any meaningful M&A growth given it only has $750 million worth of cash in a $26.9 billion company.
ConAgra (NYSE: CAG): A Mixed Bag
ConAgra’s fortunes seem to be on the rise with the stock on a solid upward trajectory since late July, gaining 29.4% from the 52-week low. Analysts forecast 6.8% annual EPS growth over the next five years, and this will be driven by effective margin management, controlling input cost inflation, and the accretive benefits resulting from acquisitions. When you factor in a 3.3% dividend yield on top of the expected growth rate, ConAgra represents a safe investment with around 32% less volatility than the broader market.
We can see some of this momentum in recent expansionary efforts. ConAgra, for example, has been busy securing more active distribution channels across a whole range of retailers from Whole Foods Market to Costco and possibly Wal-Mart and Kroger. It is intensifying efforts to acquire private labels. The integration of Ralcorp, which brings in several private labels, is expected to result in cost reduction to the tune $225 million by the fourth year of operations. The deal will make the firm the biggest packaged food marketer.
At the same time, the company is challenged by negative trends in the consumer segment. In an economy affected by recession and high unemployment, consumers are sensitive to any price increase. While I would argue that the dreary sentiment of the current market sets the bar low, ConAgra's outperformance in recent months warrants hesitancy before jumping in. Even though the stock trades at 13.3x forward earnings versus 14.3x for General Mills and 17.4x for Kraft, the last two are on steeper growth curves and have a wider economic moat. For this reason, ConAgra is largely a "mixed bag."
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