The costs of goods is rising for many consumer staple companies and not all increases are being felt on the consumer level. Commodity prices surged in the fourth quarter of 2011 cutting into the bottom line of many large scale food corporations. The commodities market is down now and 2012 is expected to see continued softening. Slowing growth overseas will decrease demand and allow production to catch up. Europe is entering a recession led by an impending credit default by Greece. China is also entering what is feared to be a long term economic slowdown. The nations GDP is already at 2.5 year lows. The country's own analysts believe China will slow to 8.5% or less in 2012. Easing prices will help industrial food manufactures realize earnings growth and possibly surprise Wall Street.
The US Department of Agriculture is expecting a rise in consumer food prices of 2.5% to 3% 2012. The rise is due to increased pricing from whole sale level producers. Some companies have already had success and the rest are sure to follow. Increased prices and better input costs equal big returns ahead in 2012. In the following article I will discuss four food stocks that I believe are sure to profit investors in 2012.
Cal-Maine Foods, Inc (CALM) is the nations largest producer of shell eggs. The company has been profiting from a trend in egg production. According to data from the USDA the price of eggs rose 1.4% in December 2011 and over 6% for the year. The sharp increase, which outpaces forecast levels, is due to a decrease in laying hens on a nationwide basis, and warm temperatures in the south which is hurting production levels. The companies financial results for the quarter and six months ending in November of 2011 reflected the trend. Net sales for the quarter were up 23% and resulted in a 50% jump in earnings per share. The six month period is even better, net sales up 25% and earnings up over 32%.
The rising cost of feed, particularly corn and soybeans, cut into profits and put more pressure on egg prices. The USDA expects egg prices to stabilize in calendar 2012. This will curtail the rapid earnings growth Cal-Maine has seen this year. I think that increased efficiency of operations and softening commodities prices will lower production costs and increase earnings. Cal-Maine will surprise in 2012. The stock is currently trading around $38 and technical resistance. It is valued around 13 times earnings and yields 3.3%. The company should be releasing third quarter earnings in March, 2012 and I think it will confirm dominance in egg production. The stock has been trending up but it looks like interest is waning. A little patience will pay off with this one, a better price and yield will be possible before the upcoming release. My buy in target is $37.
Sara Lee (SLE) just made an amazing breakout. The stock is currently trading around $20, above its long term resistance. The breakout came on heavy volume following their most recent earning report, second quarter 2012. The company increased earnings on an adjusted basis by 36% and reconfirmed guidance for the full year. Sara Lee is expecting adjusted earnings per share in the range of $.89-$.95. Coffee and tea were strong performers for the company, increasing by 12%. Rising prices has also impacted Sara Lee but it has been able to successfully pass along commodity price increases to its customers. The companies cost rose by $169 million and they were able to recover $151 million with increased pricing.
The company is proposing to divide itself into two separate companies and that is what is really driving the move up. Sara Lee is profitable and growing, that is why it is splitting. The move is expected to reach completion in the early half of this year and includes a special $3 per share dividend. That is enough attract investors alone. The stock could easily trade back up to $23.
Flowers Foods, Inc (FLO) is expected to report earnings this week, on Friday. The company has been heavily shorted in expectations of the report. The current short ratio is 12% and the stock is trading around $19.25, just above a support level. Third quarter results, released in November, revealed a company making less money than expected because of rising input costs. The USDA reported that bread and cereal grain prices are up over 6.5% in 2011 because of lower harvests. The study also said that these prices have not yet been passed on to consumers and to expect price increases on the shelf in 2012. Flowers bottom line was negatively impacted for just that reason. The company increased sales by 13% in the quarter but earnings per share were in line with the previous year because of higher costs. Flowers is expecting similar results in 2012,with a 5-10% growth in sales matched with a 4-8% growth in costs. Commodity costs can be overcome by profitable businesses like Flowers. The bears are expecting weak earnings but I think a surprise will squeeze them right out of the market. The short squeeze could take the stock up to $21, if it is supported by a good report and 2012 outlook the Flowers could rise another 10%.
ConAgra Foods (CAG) beat its own expectations and was able to confirm its 2012 guidance. Increased pricing put in place to cover rising input costs helped the business to improve sales figures by 16%. The company also reported strong volume growth in the second quarter of fiscal 2012 and a 26% increase in operating profits. ConAgra expects to grow earnings per share by 2-4% in 2012 but I think this is a low estimate on their part. ConAgra sells products to major food service chains worldwide. McDonald's (MCD) and Yum! Brands (YUM) had healthy growth in foreign markets and are expecting the same in 2012. This stock is trading around $26.50, level with the 30 day moving average, and yields about 3.6%. The March update of operations will give more insight but I think ConAgra will outperform its expectations and make a new five year high.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.