Heinz Deal Shows The Enduring Appeal Of Food Companies

Includes: CPB, HRL, KHC, SOUP
by: Jonathan Yates

With his recent purchase of Heinz (NYSE: HNZ) for the holdings of Berkshire Hathaway (NYSE: BRK.B), legendary investor Warren Buffett has once again focused the attention of the investment community on the enduring profitability of food stocks ranging in size from Campbell Soup (NYSE: CPB) to Hormel (NYSE: HRL) to SoupMan (NASDAQ: SOUP.OB).

The appeal of these companies for future gains can be boiled down to 30 trillion reasons. That is the amount of consumer spending that McKinsey Global Institute, the research arm of McKinsey & Co., expects to be spent by emerging markets nations such as China, India and others by 2025. According to its report, "Who Will Win the $30 Trillion Decathlon,", that will total half of the consumer spending in the world.

Much of that will go for packaged foods such as soup, sodas and other processed items. As emerging market growth continued during The Great Recession, this spending should continue to increase by its consumers. That is certainly the way Buffett has invested for the portfolio of Berkshire Hathaway .

The largest holding for Berkshire Hathaway is Coca-Cola (NYSE: KO), which is active in every country in the world except for North Korea and Cuba. He also has a large position in Wal-Mart (NYSE: WMT), the world's largest retailer that sells a great deal of packaged food items at home and abroad. Buffett has also bought entire end use food companies such as Dairy Queen, the fast food chain, and Sees Candy, a niche candy maker.

Companies such as Hormel, SoupMan, and Campbell are also well positioned to gain from this growth around the world. As global consumers grow more affluent, the diet becomes richer in protein and more focused on convenience. This is obviously why Buffett invested billions in the packaged goods of Heinz. It is a major reason why Hormel, the purveyor of Spam and other processed meats is up more than 24% for 2013. Much of that can be attributed to the popularity of Spam in China and other parts of Asia. That is why the soup and other items of SoupMan and Campbell should also reward investors.

At present, the packaged soup market is $6 billion in total sales. Although it is dominated in size by Campbell, SoupMan ladles up the eternal cool factor. First immortalized in an episode of Seinfeld, the "Soup Nazi" established its niche in Manhattan lore and then in prime time television across the world with its uncompromising quality and unyielding assault on the taste buds of consumers with its wide variety of tantalizing flavors. It is now being offered in more than 3000 Safeways (NYSE: SWY) and other stores across the country.

SoupMan is more than just a one-episode wonder. It has been rated the best by Zagat, The New York Times, and Consumer Reports, among others. With the enduring popularity of Seinfled, whenever the "Soup Nazi" episode plays, SoupMan receives millions in free publicity. It is difficult to think of another company that benefits in this manner, which yields to SoupMan a huge competitive advantage.

It is tough to go wrong in a sector with companies that are backed by Warren Buffett, Seinfeld, Zagat, and $30 trillion in annual consumer spending. Obviously, not all of that $30 trillion in consumer spending in 2025 will go towards packaged foods. At present, however, by a ratio of 14 to 1 consumers buy packaged vegetables over fresh vegetables. And $6 billion of that consumer spending on packaged food does goes to soup. With the world getting richer, that should increase in the future with the shareholders of Campbell, Hormel and SoupMan likely gaining as did those who owned the stock of Heinz before the Buffett buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.