The food sector has gotten a bad rap lately. I would like to challenge the supposed 'weak outlook' by pointing to several companies in this sector that are currently moving or are poised to move.
Recently, Goldman Sachs downgraded General Mills (NYSE: GIS), Campbell Soup (NYSE: CPB), and J.M. Smucker (NYSE: SJM) based on a weak outlook. The firm removed Campbell Soup from its Conviction Buy list, downgraded J.M. Smucker to "Neutral," and General Mills to "Sell."
To explain this downgrade, Goldman Sachs issued a note implying that fundamentals are expected to decline and high valuations make the space unattractive. It pointed to General Mills in particular as making an unwise move, rolling out a number of new cereals this year. This space has declined 3% in 2012 and Goldman Sachs believes that this decision will be the beginning of its fall.
There are those that will buy into this simply because it comes from the wise and trusted name of Goldman Sachs. However I think the real factor to determine whether or not downside exists is valuation. Comparing each company from a valuation and fundamental point-of-view, a surprising (and one might add optimistic) trend emerges.
The first thing one notices is that these are three companies that are valued almost identically in terms of price/sales, forward P/E ratio, cash flow (compared to market cap), margins, etc. Even so, as these companies focus on different products, the scope is so varied that no clear choice as the best is possible. All have challenges to face, and all will approach these in different ways.
General Mills does face some adversity with its cereal business, but overall is a very solid company. With a forward P/E ratio of 14.01 it's hard for me to understand how the company's valuation played a role in the "Sell" rating. This is a company that has increased its dividend by 65% over the last five years, has a forward yield of 3.20%, and has institutional ownership of 70%. The company also has a market capitalization of $29.90 billion. While generating revenue of $16.657 billion and a net income of $1.5 billion, it boasts an operating margin of 15.38% and a net profit margin 9.01%.
The price ratios of the company are equally notable. The P/E ratio is 17.06, the P/S ratio is 1.79 and the P/B ratio is finally 4.67. The dividend yield amounts to 2.85% and the beta ratio has a value of 0.17.
Campbell's Soup Company was another on Goldman Sachs' list, and this one, rightly so. This company's growth is equal to that of General Mills yet has nearly 9% of its float being short. The total debt represents 42.73% of the company's assets and the total debt in relation to the equity amounts to 310.69%. Furthermore, the company has institutional ownership of 43% and has only increased its yield by 32% over the last five years. In a weak economy, Campbell's presents the greatest likelihood for loss.
That being said, shares recently reached a new 52-week high of $42.23 on Tuesday. Average volume of shares traded over the last 3 months stands at approximately 1,918,550. Moreover, the stock currently trades at a forward P/E of 16.5x, at a slight premium from the peer group average of 16.2x.
Campbell's is not the only soup company out there, and investors have options that could potentially see good growth. The Original Soupman Company [OTC: SOUP] is a company that has been steadily growing for the past several years. Penny stocks such as these allow investors to explore certain markets, without risking an extensive amount of money. Furthermore, if the stock were to dip in price, the investor will not have lost excessive amounts of money.
The biggest advantage is the potential for very high returns on investment. It is not uncommon for some penny stocks to double or triple in price in extremely short periods of time much like Soupman has done. With a market cap of about 17.3M, just this week the stock is up 11.36%. Perhaps misleading, as it still is only $.55 per share. Soupman is riding the wave a of its current rating as Zagat's #1 'best-tasting soup in the world'. With growth reaching over 3,000 supermarket chains across the United States, this company is another that cannot be counted as a 'downgrade'.
Finally, J.M. Smucker has enjoyed slightly better growth. The stock has the highest institutional ownership, nearly 75%, and has increased its dividend by an incredible 90% over the last five years. Much like Campbell's, shares of Smucker hit a new 52-week high of $97.75 two weeks ago after reporting solid fiscal third quarter results on Feb 15. The company beat its previous 52-week high of $95.35 attained on Feb 27, and has generated a return of approximately 9.1% since Dec 31, 2012. The company's long-term estimated EPS growth rate is 8.93%. Average volume of shares traded over the last three months came in at approximately 811K. Yet another example of a steady performer.
Food is consumer based and while spending will slow and perhaps even stop in several sectors when the economy dips, spending on food will not. Many consider the food sector to be a boring and slow growth sub-sector that doesn't deserve much thought. However, over the past decade food has been one of the most reliable sectors with strong dividends.
After analysis of past stock performance and the fundamentals of each of these companies, I see no reason for the pessimism Goldman Sachs has offered. These companies operate in industries that will remain strong due to an increase in population and all are attractively valued. Therefore, it might be wise to use the selling as an opportunity to buy one of these stocks that should remain strong, regardless of the market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.