As most investors know, cash, money market, and other savings accounts currently generate next to nothing in returns. This has forced investors into making some tough choices and many of them are putting their money into dividend stocks. Businesses are facing a similar problem, since cash on the balance sheets earns very little and corporations must find ways to generate returns for shareholders.
Considering that many companies have cash-rich balance sheets, company valuations are low, and that it's cheaper than ever to finance a buyout with interest rates at record low levels, many corporations are finding that merger and acquisition deals are one of the best solutions for generating higher returns.
Campbell Soup Company (CPB) recently announced a $1.5 billion deal to buy Bolthouse Farms, a specialty food maker that has found success by offering salad dressings, snacks, and drinks that appeal to health-conscious consumers. This trend of larger companies buying smaller health and specialty food makers is likely to continue because big companies can leverage existing distribution and marketing resources to create exponential revenue growth as the secular shift to healthy foods increases over time. The interest in health-focused food companies will also continue because there is so much money in it. Just look at the sky-high valuations for companies that deal with health and specialty products, like Whole Foods (WFM), which happens to carry products from some of the food makers listed below. These types of companies have price to earnings multiples that far exceed the average multiple for "conventional" food makers by a wide margin. While Campbell Soup shares trade at only about 13 times earnings, Whole Foods trades around 42 times earnings.
Since valuations show it is far more profitable to grow sales of health foods, it makes sense to consider the various industry players and evaluate which stocks could be prime buyout targets, or be poised to rise substantially on the heels of a secular growth trend as these companies expand health food offerings and make acquisitions. Below is a closer look at 2 health and specialty food makers that could be potential takeover targets and 3 larger companies that are increasingly focused on specialty and health food products, which could make them likely to see higher growth, as well as candidates to possibly acquire smaller companies in the future:
Smart Balance, Inc. (SMBL) shares were trading around $5.50 in May, and have just about doubled in the past few weeks. Again, it's impressive to see the valuation of this specialty foods company, which now trades for about 50 times earnings estimates for 2012. The huge rise in the stock started right after this company announced it would buy a company called Udi's Healthy Foods, which specializes in gluten-free foods. Udi's has seen sales rise from just $4.3 million in 2009, to about $60.0 million in the year ending on March 31. This increase shows the tremendous growth potential of health and specialty food products. Gluten-free foods are part of a growing health trend and people with celiac disease need these specialty products for their diet. Stores like Whole Foods have been expanding the selection of gluten-free food products and it carries Udi's. Smart Balance agreed to pay $125 million for the company, about two times last year's sales. This acquisition is another sign that deal-making is an ongoing trend in this industry.
Udi's gluten-free foods fits well with the existing Smart Balance product line, which includes Earth Balance brands, butter, peanut butter, cooking oil and cooking sprays, mayonnaise, popcorn, milk and sour cream. Smart Balance could be a prime acquisition target for a number of companies, although the recent run in the stock might leave some companies wishing they had acted sooner. With a focus on healthier foods, this company is poised to benefit from the secular trend taking place in this industry and it can grow whether or not it sees a takeover. With a market cap of about $670 million, there are a number of large companies that could afford to snap up Smart Balance and its rapidly expanding product line.
Key Data Points For Smart Balance From Yahoo Finance:
Current price: $11.22
52-Week Range: $4.62 to $12.35
2012 Earnings Estimate: 21 cents per share
2013 Earnings Estimate: 33 cents per share
Tofutti Brands, Inc. (TOF) is a specialty foods company that is known for dairy-free products, which include ice cream, sour cream, cheese, chocolate chip cookies, pizzas and more. As more people are diagnosed as being lactose intolerant and as health-conscious consumers favor lower cholesterol foods, this company appears poised to benefit from a secular trend. While this company is relatively small, the products it has are popular and it has a loyal following. One recent challenge for the company is that Trader Joe's recently discontinued carrying branded items like "Tofutti," and this caused sales to slow earlier this year, for what just might be a temporary amount of time. Since many shoppers frequent more than one store, I think the company will see a rebound in sales as shoppers learn to buy Tofutti products when they are at Whole Foods instead of Trader Joe's. The dairy-free ice cream sandwiches it makes are called "Tofutti Cuties," which is one of the most popular items for this company. I have tried these ice cream sandwiches and they are delicious and low in calories (only 130 each). Tofutti also makes non-dairy ice cream, which is carried at Whole Foods and other major stores. The company is developing and introducing new products like chocolate mint pops as well as new flavors of its ice cream sandwiches.
Another big positive is that this company has a debt-free balance sheet, which makes the company stand apart since most companies have debts. This company has a good thing going, but a bigger company with a larger sales and distribution network would most likely be able to create a major boost in revenues for these specialty food products and make them more mainstream. A private equity firm could also find this company as an attractive acquisition target with the idea of investing more money into expanding the product line and the distribution channels. That's why it would not be surprising to see a buyout offer come in for Tofutti Brands. Food stocks have been outperforming in a weak market and this trend is likely to continue. With Tofutti trading at a cheap valuation, this stock appears to have significant upside whether or not a takeover occurs. The CEO, David Mintz seems to know he has something good going and in a recent video interview, he elaborated on plans to take the company to another level by expanding sales. The company recently raised prices and that could lead to higher profit margins.
Key Data Points For Tofutti Brands, Inc. From Yahoo Finance:
Current price: $1.57
52-Week Range: $1.34 to $2.55
2012 Earnings Estimate: not available on Yahoo Finance
2013 Earnings Estimate: not available on Yahoo Finance
Here are the companies that could be poised to make acquisitions in the future as well as benefit from further expansion into the health and specialty foods category:
Dean Foods Company (DF) is a leading maker of branded and private label dairy products which includes: coffee creamers, ice cream, yogurt, cottage cheese, half-and-half, sour and whipping cream, fruit juice, ice tea, silk soymilk, milk and others. This company has been a serial acquirer of health and specialty food products and more acquisitions could be in the cards. In 2002, Dean Foods acquired White Wave, Inc., the maker of Silk, refrigerated soymilk. In 2004, it acquired Horizon Organic Holding Corporation, which makes organic milk and dairy products. In 2009, Dean Foods acquired Alpro, a maker of soy-based products in Europe. Since this company has been focused on acquiring dairy and specialty food companies in recent years, it seems that a company like Smart Balance or Tofutti could be an interesting candidate, since it could rapidly expand the distribution through its existing channels. Since Smart Balance and Tofutti make dairy, non-dairy or dairy replacement products, it could make sense for Dean Foods to consider these companies.
Key Data Points For Dean Foods Company From Yahoo Finance:
Current price: $16.25
52-Week Range: $7.94 to $17.50
2012 Earnings Estimate: $1.24 per share
2013 Earnings Estimate: $1.33 per share
Kraft Foods, Inc. (KFT) is a global leader in biscuits, chocolate, gum, candy and nuts. It owns some of the most popular food brands. Here are just a few that it owns: A-1 Steak Sauce, Cadbury, Dentyne, Chips Ahoy, Cool Whip, Capri Sun, Crystal Light, Gevalia, Halls, Honey Maid, Jell-O, Kool-Aid, Lu, Oscar-Mayer, Maxwell, Miracle Whip, Nabisco, Newtons, Oreo, Planters, Ritz, Toblerone, Trident, Triscuit and many more. Kraft sells these items in over 170 countries, and it had revenue of $54.4 billion, in 2011. Kraft Foods announced plans to divide (on or about October 1, 2012) into two public companies: a global snacks business and a North American grocery business. Although some Kraft products don't fit the health foods profile for some consumers, it appears to be focusing more and more on health and consumer nutrition. The company website states:
"We're helping consumers manage their calories, reduce sodium, increase whole grains and reduce fat. Since 2005, we've reformulated and launched more than 5,000 better-for-you products around the world to meet the needs of consumers."
Kraft Foods has a long history of merger and acquisition deals. The largest recent deal was when it agreed to acquire Cadbury for about $19.5 billion in 2009. After the pending break-up into two separate companies is completed, we could see more deals from both companies, especially since each company would have a more clearly defined focus.
Key Data Points For Kraft Foods From Yahoo Finance:
Current price: $39.82
52-Week Range: $31.88 to $42.44
Dividend: $1.16 which provides a yield of 2.9%
2012 Earnings Estimate: $2.48 per share
2013 Earnings Estimate: $2.76 per share
General Mills, Inc. (GIS) recently agreed to acquire a food company in Brazil called Yoki Alimentos S.A.,which offers snacks, convenient meals, soups, grains, beans and seasonings. General Mills is known for Cheerios and Wheaties, as well as brands like Green Giant, Gold Medal Flour, Yoplait, Pillsbury, Betty Crocker and more. General Mills has been focusing on the healthy foods market for years and it now owns Cascadian Farm and Muir Glen, which offers organic foods. Due to the size of this company it is more likely to be a buyer of more small companies rather than a takeover target. It is a solid stock for income investors because it has been paying a dividend for 113 years. The dividend also has a history of rising, and it has jumped from about 14 cents in 2004 to 30.5 cents per quarter in 2012. This company is well-positioned to make additional acquisitions in the future and then use its marketing and distribution network to grow revenue.
Key Data Points For General Mills From Yahoo Finance:
Current price: $39.29
52-Week Range: $36.61 to $41.06
Dividend: $1.32 which provides a yield of 3.4%
2012 Earnings Estimate: $2.66 per share
2013 Earnings Estimate: $2.89 per share
Data sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KFT, TOF, SMBL over the next 72 hours.