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, Cory Renauer (20 clicks)
Biotech, healthcare, value, long-term horizon
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When the markets get jittery it's always great to know you have something in your portfolio that never fails. You can hardly get more defensive than the packaged food sector. Nearly all of the major players here market brands that have been popular for several generations. To some extent, these brands give them pricing power that allows them to maintain their profit margins even in the face of competition from would be competitors.

The contenders are Campbell Soup (NYSE:CPB), ConAgra Foods (NYSE:CAG), Dean Foods Company (NYSE:DF), General Mills (NYSE:GIS), Kellogg (NYSE:K). All five are beating the S&P this year. All 5 companies have had an impressive run up over the past year. I'm going to put them in the ring to see which, if any, warrant further attention. In an attempt to choose the best of the bunch I'm going to put them all in the octagon. The winner will be the subject of a more focused post in the very near future.

(click to enlarge)

HJ Heinz Company (NYSE:HNZ) isn't competing in the tournament, because I want to wait until the dust settles from the merger and subsequent lawsuit against the company, 3G, and Berkshire Hathaway (NYSE:BRK.B). Kraft Foods Group (NASDAQ:KRFT) has only traded publicly since last October, and Mondelez International (NASDAQ:MDLZ) is more of a confectioner, so they will both sit this one out.

The Rules:

  • Five companies enter, one company leaves.
  • For each round, first place winners receive three points.
  • Second place winners receive two points.
  • Third place winners receive one point.
  • After six rounds, the company with the most points wins.

Source: YCharts

Campbell Soup

ConAgra Foods

Dean Foods Company

General Mills

Kellogg Company

Operating Margin TTM

14.23%

6.6%

3.73%

16.0%

11.00%

Return on Equity

65.94%

10.23%

319.1%

24.99%

43.95%

Debt to Equity Ratio

3.84

2.06

6.75

1.08

3.19

Long Term Debt

$2.94B

$10.57B

$3.10B

$7.38B

$6.84B

Net Income TTM

$741.0M

$493.9M

$158.62M

$1.81B

$961.0M

Round 1: Operating Margins TTM

In the first round, I want to measure these companies' ability to maintain margins in the face of fluctuating commodity prices. Taking the average over the past twelve months smoothes out temporary spikes and dips.

  1. General Mills: 3 points
  2. Campbell Soup: 2 points
  3. Kellogg Company: 1 point

Round 2: Return on Equity

Dean Foods has such a high ROE that you would think it found a way to turn milk into gold. This is hardly the case. Dean Foods is disqualified from this round for cheating. The dairy giant's net income and shareholder equity values swung from deep negative territory to somewhat positive over the past year, which results in a skewed ROE figure.

  1. Campbell Soup: 3 points
  2. Kellogg Company: 2 points
  3. General Mills: 1 point

Round 3: Debt to Equity Ratio

This measure of liquidity really separates the wheat from the chaff. A well managed company can use its net income to expand its reach, increase brand value, buy back shares or simply distribute larger dividends to shareholders.

  1. General Mills: 3 points
  2. ConAgra Foods: 2 points
  3. Kellogg Company: 1 point

Round 4: Ability to Repay Debts Quickly

Both ConAgra and Dean Foods would need about 20 years to repay their debts. That's just plain scary. If Campbell Soup used every dollar of net income to repay its long-term debt it would only need just under four years. General Mills would need just a touch over four years.

  1. Campbell Soup: 3 points
  2. General Mills: 2 points
  3. Kellogg: 1 point

Now let's try to project how much we stand to gain on these stocks if purchased at the close of the last trading day.

Campbell Soup

ConAgra Foods

Dean Foods Company

General Mills

Kellogg Company

Closing Price On Tuesday, April 23

$46.73

$36.09

$19.06

$50.66

$66.50

2003-2012 EPS CAGR

5.21%

(2.48%)

(9.36%)

7.18%

3.35%

2003-2012 Dividend CAGR

13.92%

0.1%

N/A

10.7%

5.71%

Projected 2022 EPS

$4.01

$0.87

$0.32

$4.70

$3.71

Projected Price at P/E = 20

$80.11

$17.42

$6.36

$94.00

$74.25

Accumulated Dividends

$50.92

$10.06

$0

$27.73

$24.19

Projected Annual Return

10.86%

(2.69%)

(10.38%)

9.16%

4.00%

As with any projections, I've made several important assumptions. Most importantly I'm assuming that the companies will continue to grow or contract at the same compound annual growth rate as they have over the last decade. Also, in this projection dividends are not reinvested, or taxed. Finally, the projected price is based on a P/E ratio that is typical for this sector.

Now let's get back to the action.

Round 5: Earnings Growth

Over the past decade both ConAgra and Dean Foods shareholders have experienced a contraction of earnings that does not bode well for their futures. Declining earnings and practically unpayable debts makes these two food companies downright unsavory. I wouldn't touch either of them with a barge pole.

  1. General Mills: 3 points
  2. Campbell Soup: 2 points
  3. Kellogg Company: 1 point

Round 6: Dividend Growth

Campbell Soup and General Mills are clearly the first and second place winners of this round. Personally, I would rather these companies keep their dividend and reinvest it into their highly profitable operations.

  1. Campbell Soup: 3 points
  2. General Mills: 2 points
  3. Kellogg Company: 1 point

And the winner is...

General Mills by a single point over Campbell Soup.

Campbell Soup

ConAgra Foods

Dean Foods Company

General Mills

Kellogg Company

13 points

2 points

0 points

14 points

7 points

Surprisingly, General Mills typically trades at a P/E ratio between 14 and 18, lower than all the others do.

If these companies continue to increase both earnings and dividend distributions in the following decade at the same rate as they have over the past, I think they are both a little too expensive. If you feel that you absolutely have to start a long position right now, both Campbell Soup and General Mills should offer you a return of roughly 10% compounded annually.

Personally, I don't like to open a long position unless I can expect a CAGR of at least 15%. I hope that I'm not the only one here that lets price determine my entry point. I'm setting an alert for both Campbell Soup and General Mills at a price that should offer a juicier return over the long term. For Campbell that's $32 and for General Mills that's about $30. In the meantime, I'm going to go spelunking in both companies' SEC filings and research their expansion into emerging markets.

A cry for help

In this post, I've focused heavily on these companies' numbers, not their news. If you have something to add to the picture, I'm certain the Seeking Alpha Community and I would appreciate it.

Source: The Packaged Food Sector Smackdown