Food Stocks: Time to Stock Up

by: Mark Krieger

Food stocks have been on a tear lately. Attributes such as more predictable earnings, juicy dividends, lower volatility and more reasonable price multiples are at the forefront of the sector’s recent success. They aren’t highflyers, glamorous or exciting like the tech sector, but they will help you sleep better at night.

The Basic Food Fund (BFF) certainly lagged the overall market the past five weeks rising a mere 9% from $167.73 to $182.93 compared to a more robust rally in the DJIA's 14% hike from 8332 to 9506, but it also won’t fall like a rock when the major averages correct through profit taking in the near future.

Component update:

Although LUB reported horrible 3rd quarter results due to a 8.9% drop in same store sales, all is not bad as the company was still able to reduce its food, labor and other expenses categories by the implementation of stringent cost controls . The good news is these shares have been so beaten down, that they really have nowhere to go but up at this juncture. The company is expected to report 4th Quarter results in early October that should be easy to surpass. Estimates of $86 million in sales and a loss of 20 cents are way too low and the fact the company is attempting to juice up sales by announcing pricing cuts on over 100 menu items bodes well for a nice revenue boost.

TSN: The company beat the street by two cents when they reported third quarter earnings of 35 cents versus 3 cents, but the shares did not rocket higher, as TSN’s CEO indicated that its fourth quarter could be soft. There is no doubt that the CEO’s verbiage could be a classic sandbagging attempt in order to under promise in order to over deliver. I think TSN will do just fine, but would look to book profits near the $13 area.

SFD: The company issued $225 million worth of notes, which it intends to use to pay off its European revolving credit facility. This action should help reduce its exposure to financial covenant risks - a nagging worry of Wall Street. The stock looks like it is ready to challenge the $13-14 area soon.

BRID: The snack food producer is scheduled to report third quarter results Monday after the close. Revenues of $26 million and earnings of 10 cents are expected versus last year’s 21 cent loss on the same revenues. The shares continue to make new highs on increasing volume and are close to breaching a $10 major resistance area. If the stock price can punch through this area, the sky is the limit as the stock once traded as high as $24. One other tidbit that could light this one up is its recent doubling of shares shorted, all those shares have to be eventually repurchased, and with a float of less than 1 million shares, any short covering could have a huge impact on the share price.

CAG: with a fat dividend yield of nearly 4% and forward P/E of only 12 times 2010 earnings estimates of $1.65, how can you go wrong with this holding in your portfolio?

SLE: The market got spooked when SLE produced poor fourth quarter earnings and provided soft guidance, but its selloff offers a decent buying opportunity as a patient value play. Wildcards for a spike in the share price are a change of management, the spinning off of a major subsidiary or an outright sale of the entire company.

DLM: This one has been on a rocket ship to the moon lately, with an upgrade from Moody’s and a blowout earnings report helping fuel the rise. Be ready to ring the cash register at $12, as this one is getting a bit overbought.

Supermarkets still on sale: I like the grocery chains because most of them still have not seen too much appreciation in their share prices, so when buying pressure eventually emerges, their potential for rise will be that much better. WINN has been the winning pick of the group, nearly doubling from its March low. The fact the chain is debt free is the cherry on top.

SWY reported weaker than expected second quarter earnings prompting a quick and dirty selloff. The shares, now trading at a multiple of only 11 times 2009 estimates of $1.77 and a 2% dividend yield, represent good value, especially since the last time the stock was this low, was 12 years ago.

SVU is the cheapest of the bunch at only 7 times 2010 earnings estimates and nearly a 5% dividend yield. The street is concerned with SVU’s debt load, but this worry could be overplayed as the company has been doing a good job of steadily trimming it. The shares have made a nice comeback from their lows, rising over 75%.

GAP had a dismal earnings report, but the cavalry charged in to rescue them. Ron Burkle’s Yucaipa Inc. agreed to invest $115 million, while GAP’s largest current holder, the German supermarket operator, the Tengelmann Group , put up an additional $60 million. A subsequent successful $260 million note offering has enhanced the company’s liquidity and balance sheet and Wall Street has apparently approved- sending the shares up almost 75% since the Yucaipa deal was announced.

IPSU: The largest US sugar refinery has been on a sweet run mirroring the worldwide sugar shortage. A spike in sugar prices along with a major drop in natural gas prices is exactly what IPSU has been looking for to put its bottom line into orbit. A run to the $20 level in the next six weeks is more than warranted.

CKR: The burger chain continues to innovate through clever ad campaigns and refusing to join the discount burger wars. The eatery caters well to young hungry males with what they desire most-Beautiful women and plenty of good food-certainly a winning combination in my book. A recent bullish article by Barron’s and an upgrade by Credit Suisse from neutral to outperform have provided the sizzle.

FLO: The bakery titan continues to prosper and is on the acquisition path as it seeks to expand its west coast presence. The company recently reported a 14% increase in its second quarter sales, translating to a 7% earnings increase. FLO is still cheap at only 16 times trailing earnings and apparently management agrees, as two insiders have recently purchased shares and the company has an ongoing share buy back program in effect (the company has purchased back 22 million of the 30 million shares authorized). This one could quickly rally to $30.

Bottom line: Although the overall market is certainly overextended and due for a pullback, most food stocks still have plenty of fuel in their tanks for further upside. When the market goes into a profit taking mode, these low beta stock’s will see minimal price erosion. A combination of a decrease in input costs, payroll reductions and more consumers eating at home, bode well for this defensive sector.

Disclosure: long each component