investingfromtheright

I am retired and take educated guesses on all things financial.

October 17, 2006

October 18, 2006: FOOD for thought

I am getting beyond post-partum from the weekend wedding. The bride and groom are celebrating their honeymoon in Belize, prior to reporting back to their USAF assignments.And the wedding costs are paid. All in all, life is good.

While eating some neat stuff at the rehearsal dinner and the reception meal, I thought a little about the costs and direction of food. Catering is a huge business. Fast food, organics, Wal-Mart, full service groceries, convenience stores, etc. Food. Food. Food.

Today I spent some time looking at food companies and the direction of the food business. Surprisingly, it was interesting and lots of fun.

The biggest surprise was that traditionally "low quality" companies such as Heinz, Sara Lee and ConAgra grew in the 3-5% range per year on average at retail while "high quality" companies like Kellogg and Hershey grew at only 1-2%. Campbell's categories grew 3% in dollar sales but only 0.4% in volume.

Categories positioned in health and convenience food have grown the fastest over the past three years, especially frozen foods (5-7%), refrigerated entrees (14%), chewing gum (9%) and yogurt (6%). A lot of the gains, I was told, are a bit reflexive because of the hits these areas took during the Aktins diet craze. Powdered desserts (Kraft) and packaged tuna (Del Monte) suffered the biggest declines. On a personal note, that packaged tuna smells like a poorly bathed bum, so no surprise to me (who can eat that rubbish!).

Therefore:

Robust demands for chewing gum indicates that Wrigley has the right platform for a turnaround if it can respond to competition creatively.

Kraft (K),Hershey (HSY) and Campbell (CPB) can continue to achieve their low single-digit growth targets even though data indicates that they might need to generate 25% or more of their growth from market share gains. Barring poor marketing decisions, there is no reason that their growth should "hit a wall" for any length of time. Safe bets, if you will.

The good news for Sara Lee (SLE) and ConAgra (CAG) is that consumers appear to continue to shop even for the most mundane of foodstuffs and actually will respond to marketing of same.

Tracking food portfolios by DOLLAR sales growth vrs. volume growth, note the current rankings:

Refrigerated entrees 14.4%
Coffee (ground) 12.0%
Chili 9.0%
Meat snacks (jerky,etc.) 8.7%
Chewing gum 8.6%
Desserts (single serve) 7.5%
Frozen potatoes 7.5%
Nuts 7.4%
Dog/Cat treats 6.9%
Powdered soft drinks 6.6%
Frozen hors d'eouvres 6.5%
Yogurt 6.3%
Canned tomatoes 5.9%
Cooking sprays 5.8%
Frozen dinners 5.3%
Side entrees/shelf stable 5.3%
Cheese 5.2%
Sliced lunchmeat 5.1%

Categories in fastest decline are gelatin mixes (-11.9%), cooking sauces (-3.6%), pudding mixes (-2.3%), popcorn, canned tuna and canned fruit (perhaps the nutritionally void food of the lot). Packaged tuna is about 15% of Del Monte's sales. Kraft has $300 million in gelatin and pudding mix sales. Consumers are also shifting away from powdered beverage and into more convenient ready-to-serve beverages. Kraft has about $610 million in ready-to-serve beverages and $525 million in powdered soft drink sales - almost a wash.

So, what to buy if you are picking food stocks for your portfolio? I will be looking at the following. Maybe one or two might be worthy of consideration in a balanced portfolio tilting a bit defensive.

Sara Lee (SLE) on a pullback to 14
Wrigley (WWY) on a pullback to 40
Kellogg (K) on a pullback to 44
Campbell (CPB) on a pullback to 32
Con Agra (CAG) on a pullback to 21
Heinz (HNZ) on a pullback to 36

As you can sense, I think all are a bit ahead of themselves right now, with the market bursting to new highs regularly.

MY FAVORITE FOOD/MEAT/PROCESSING/RETAIL FOOD DISTRIBUTION STOCK REMAINS SMITHFIELD FOODS (see previous posts on this blog) SFD is a winner and should be bought now.

Links to this post:

Create a Link

<< Home