Reasons to Be Bearish on These 2 Food Stocks
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While I am generally bullish on every sector of the economy right now, there are some I would avoid due to macro headwinds that are not being fully discounted into stock prices. From rising input costs to greater competition, food marketers are in a challenging position right now. In general, I see few stocks to be optimistic about in light of flattening growth curves and limited multiple discounts. Below, I review General Mills, Kellogg, and ConAgra with a mostly pessimistic view.
Why Analysts Wouldn't Buy General Mills (NYSE: GIS)
General Mills' FY second quarter profits were up an unexpected 22% as the company saw increased performance from its new acquisitions and higher wholesale orders.. To cope with the increasing production price of raw food for its packed foods, especially cereals, General Mills started to reduce the amount of workers and production costs of other products to avoid the possibility that it has to increase the end prices to keep-up with expected revenues.
The food marketer trades at a respective 15.3x and 14.3x past and forward earnings with a dividend yield of 3.2%. Analysts forecast 8% annual EPS growth over the next five years. By contrast, Kellogg (NYSE: K) trades at a respective 17.6x and 15.9x past and forward earnings with a dividend yield of only 3% and an EPS growth rate forecast of only 6.8%. With the stock near its all-time high and up 28% from the 52-week lows, it is risky to buy at this possible peak. General Mills' relative underperformance warrants a preferential buy.
There are, however, several reasons to be worried about General Mills. First, the food marketer saw its shares downgraded to "sell" by Goldman Sachs. Analysts at the prestigious investment bank believe that its new cereal lineup won't fare well this year and certainly won't make up for the company's soft sales elsewhere. Cost inflation has been on the rise: 2% to 3% expected for next year and, perhaps most disconcertingly, Yoplait is decelerating despite the popularity of Greek yogurt.
Why I Wouldn't Buy ConAgra (NYSE: CAG)
ConAgra announced on Jan. 7 that they are ready to sell $240 million worth of shares through a public offering with an optional $35 million more. The attention is to use the net proceeds to fund the Ralcorp buyout. I do not believe the deal will collapse, since Ralcorp ultimately secured a no-action letter from Canadian regulators revealing that the merger will not be challenged. More concerning is the firm's financial position. S&P recently lowered ConAgra's credit rating to BBB-, threateningly trending towards junk status. This is despite management's estimate that the takeover will produce a $225 million run rate worth of cost savings by the fourth year.
In December 2012, ConAgra reported a 17% increase in profits for its fiscal second quarter. ConAgra’s largest business, the food business, reported an 11% increase alone from the 17% total, which mostly resulted from the buyout of Unilever. Revenue and earnings both came up ahead of consensus, but the volume of orders isnn't expected to rise much in the next year or two as more and more food companies are reporting declines in sales.
The stock is now trading at its 52-week high after rising a relentless 37% from the 52-week low. At a respective 19.6x and 13.9x past and forward earnings, the stock looks decent with a growth forecast of 8.4%. Assuming the stock meets expectations, 2016 EPS will come out to $2.90. At a multiple of 15x, this translates to average annual returns of 10.5%. That's not a tremendous return for an active investment that will probably put it in the position to generate greater taxable turnover. I therefore recommend avoiding this mixed bag.
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