In the past several months, I've written two series of articles related to low-priced stocks to buy and low-priced stocks to avoid. For each round of articles, I focus on three stocks currently priced under $10 and review them as to whether I believe them to be worth looking at as potential buys for long term investors.
Using the same format, I will take a look at stocks in specific market sectors and review them in a similar manner. For this first article, I will be taking a look at consumer goods stocks. And Round 1 will focus specifically on the food industry within this sector.
In determining why I find these stocks attractive, I will be looking at each company's financial performance, current valuation, recent trading activity, dividend policy, earnings and future outlook.
Stock No. 1
Cal-Maine Foods, Inc. (CALM) produces, grades, packages, markets and distributes shell eggs throughout the United States, selling more than 600 million dozen shell eggs a year. CALM was founded in 1969 and is based in Jackson, Mississippi.
|Gross Profit Margin (Quarterly)||14.06%|
|Profit Margin (Quarterly)||2.74%|
|Return on Assets (TTM)||6.75%|
|Return on Equity||9.76%|
|Revenue (Quarterly YOY Growth)||17.07%|
Looking at the chart below, you can see that CALM's revenue has increased significantly at a steady pace the past few years.
CALM Revenue (TTM) data by YCharts
During this time, the company's gross profit has not seen the same growth, remaining flat over the past couple of years.
CALM Gross Profit (TTM) data by YCharts
Current Valuation and Recent Trading Activity
CALM has a current price-to-earnings value of 25.83x and a price-to-book value of 2.46x.
CALM closed Tuesday at $54.46, setting a new 52-week high and trading $15.95 higher than its 52-week low. It is trading above both its 200-day moving average of $48.49 and its 50-day moving average of $51.52.
CALM has seen the following price returns:
|1 Month Price Return||3.24%|
|Year to Date Price Return||35.41%|
|1 Year Price Return||22.91%|
|3 Year Price Return||76.65%|
For its latest quarter, CALM reported earnings per share of $0.36, which was 3 cents less than the same period last year.
From the chart below, you can see that CALM has been unable to sustain any positive growth in earnings over a significant period of time.
CALM EPS Basic (TTM) data by YCharts
CALM has a variable dividend policy that is earnings based. The company pays out a third of its profits in dividends on a quarterly basis. It's latest dividend was $0.068 per share and it has ranged from $0.52 per share to $0.044 cents per share in recent years.
While this creates some uncertainty and most not likely preferred for investors looking for dividends as income, I think this policy is a perfect fit for long term investors looking to add shares of this stock over time.
CALM has seen its fair share of struggles over the past few years, mainly related to flat earnings and profit. I think the company will continue to see increased revenues and will soon start seeing long term increases in profit/earnings as well, which is significant considering the company's variable dividend policy. As another SA author noted in his article, lower costs and the effects of the Prevention of Farm Animal Cruelty Act are additional signs that CALM is poised to reward long term investors over the coming years.
Stock No. 2
Kraft Foods Group, Inc. (KRFT) is a consumer packaged food and beverage company that manufactures and markets a wide variety of products under several brand names including Cool Whip, Jell-O, Kraft, Oscar Mayer, Planters, Stove Top, Velveeta, Lunchables, and many more. KRFT was founded in 1980 and is headquartered in Northfield, Illinois.
|Gross Profit Margin (Quarterly)||33.82%|
|Profit Margin (Quarterly)||11.38%|
|Return on Assets||8.15%|
|Return on Equity||39.18%|
|Revenue (Quarterly YOY Growth)||-4.23%|
Usually I include a chart here that shows a company's revenue and/or profit over the past five years and discuss it, but with KRFT's fairly recent spin-off from Mondelez International, this wouldn't make much sense. Instead, I'm going to focus specifically on the company's recent 3rd quarter results and how it relates to KRFT's future.
Net revenue for the company came in at $4.4 billion for the quarter, while operating income equaled $870 million. While revenue declined (even when factoring in the spin-off from Mondelez), I don't necessarily see this as a bad thing. KRFT has reduced its product line considerably and I believe that while this has caused short-term declines in revenue, I believe it will create long term rewards as the company focuses on its more popular and profitable product offerings.
Current Valuation and Recent Trading Activity
KRFT has a current price-to-earnings value of 17.06x and a price-to-book value of 6.53x.
KRFT closed Tuesday at $53.18, $5.58 shy of its 52-week high and $9.10 higher than its 52-week low. It is trading above both its 200-day moving average of $54.50 and its 50-day moving average of $53.49.
KRFT has seen the following price returns:
|1 Month Price Return||-3.24%|
|Year to Date Price Return||16.96%|
|1 Year Price Return||17.45%|
For its latest quarter, KRFT reported earnings per share of $0.83 per share. This was actually an increase over the same period last year, but this was mostly due to a $0.18 market-based benefit related to post-employment benefit plans. When discounting this benefit, EPS was actually lower by $0.05 per share.
KRFT currently pays a $0.525 per share quarterly dividend that yields 3.94%. The dividend was increased last month from its previous value of $0.50 per share. KRFT has stated that its goal is to increase its dividend by a mid-single digit rate consistently over time and there doesn't appear to be any reason why the company won't be able to accomplish this goal over the long term.
With KRFT's strong product lineup of popular brands, it's commitment to providing shareholder return through consistent dividend increases, and its expected earnings growth in the coming years, I think the stock is a perfect long term buy option for investors. I'm not alone in my thinking as RBC Capital recently initiated coverage on KRFT as an outperform stock.
Stock No. 3
Pinnacle Foods Inc. (PF) is a manufacturer of convenience food products throughout North America. The company operates through the following three segments: Birds Eye Frozen, Duncan Hines Grocery, and Specialty Foods. PF is based in Parsippany, New Jersey.
PF began trading on the NYSE on March 28th of this year.
|Gross Profit Margin (Quarterly)||27.50%|
|Profit Margin (Quarterly)||7.11%|
|Return on Assets||1.74%|
|Return on Equity||6.36%|
|Revenue (Quarterly YOY Growth)||0.80%|
Just like with KRFT, showing a chart of historical data for PF doesn't make sense as only this year's data is available, so I will once again focus on PF's most recent quarter.
In Q3, consolidated net sales increased by 1% over the same period last year ($572.5M vs. $567.9M).
Current Valuation and Recent Trading Activity
PF has a current price-to-earnings value of 32.38x and a price-to-book value of 2.13x.
PF closed Tuesday at $27.96, $0.85 shy of its 52-week high and $5.81 higher than its 52-week low. It is trading above both its 200-day moving average of $26.06 and its 50-day moving average of $27.21.
For Q3, PF reported earnings per share of $0.35 per share, up from $0.11 from the year before. An increase in gross margin, partially due to higher productivity, was a big reason for this increase. PF strengthened its EPS outlook for the full year, expecting to be at the high end of its previous $1.53 to $1.57 range.
PF has decided to pay a regular quarterly dividend. It's $0.18 per share dividend was recently increased by 17% to $0.21 per share, effective for the upcoming 4th quarter dividend. This raise brings the dividend's current yield to just over 3%.
PF's future looks to be headed in the right direction. The company has improved its margins while seeing both increased revenue and earnings. The company appears committed to its dividend, and I think consistent yearly raises similar to the one just initiated can be expected in the coming years. With PF's most popular brands such as Bird's Eye vegetables, Vlasic Pickles, and Duncan Hines baking mixes and frostings seeing increased sales, I think the company will be able to maintain growth that at least matches or exceeds the industry average. I consider PF a buy worthy option for long term investors.
The three stocks reviewed above each have the potential and in my opinion a very high probability of creating significant returns for long term investors through increased revenues/earnings and dividends. CALM has a chance to really take off as the demand for specialty eggs continues to rise. KRFT has a great opportunity to improve production and efficiency throughout its product line. While I think increasing revenue will be more of a challenge for KRFT, I think the company is on the right track in terms of streamlining its product offerings. While some of PF's brands such as Hungry Man are showing lower demand, others are increasing significantly. As the company continues to improve margins, shareholders will continue to see the rewards.
I consider all three of these stocks great buy possibilities for long term investors as the companies are doing a lot of things right compared to some competitors (three of which I will be reviewing later this week, in my 'Consumer Goods Stocks To Avoid: Round 1' article). As always, I suggest individual investors perform their own research before making any investment decisions.