With UBS's recent upgrade of ConAgra Foods (NYSE:CAG) from 'neutral' to 'buy', many investors are again looking at the viability of food stocks as a way to profit from potential food inflation.
Many economists believe food prices are rising for several reasons:
- Growing global middle class demanding a more meat-based diet. Meat production requires a lot more food (i.e. to feed the animals) than grain production.
- Changing climate is putting pressure on crop yields. This summer's drought is a prime example of the impact weather can have to food prices.
- Global money printing raising all commodity prices in general.
- Crops are being diverted to provide fuel for cars rather than food for people.
According to UBS:
On the back end of inflation in '09 ConAgra and others were quick to deal back pricing and shoot for market share since they believed that inflation was behind them. This time around, ConAgra and others seem to have learned from that experience and are wise about becoming more promotional - particularly since inflation will likely return by mid-calendar 2013.
So food inflation is the big story driving ConAgra and other food stocks. UBS also cites growth, M&A and valuation as reasons to buy ConAgra, but the food inflation story is the centerpiece.
Companies like ConAgra potentially protect and profit from food inflation because they offer staple goods and can pass raw commodity price increases onto consumers.
Below I have listed 5 for evaluation.
[Note that this is not a solicitation nor a recommendation to buy these stocks. This is simply a preliminary screen to identify candidates for further research.]
|ConAgra Foods, Inc.|
|(NYSE:CPB)||Campbell Soup Co.|
|(NYSE:GIS)||General Mills, Inc.|
|(NYSE:MJN)||Mead Johnson Nutrition Company|
All of these companies are general food packaging/marketing companies, selling widely-known brands. MJN however specializes in pediatric nutrition, such as baby formula.
Looking at forward earnings CAG, CPB, GIS and K all appear reasonably valued. However, if one takes book value into consideration a different picture starts to emerge.
Four of these five stocks pay a 3%+ yield, as shown in the table below.
Despite the challenging environment for many companies, all five companies have grown dividends steadily over the past 5 years (graph below). Moreover, they have not grown dividends at the expense of sustainability (second graph below). Dividend payout ratios remain comfortably below 80% and have been so over the past 5 years.
click to enlarge images
Analyst EPS growth projections for CAG, CPB, GIS and K leave a lot to be desired. By no means are these companies projected to be the next Apple (NASDAQ:AAPL). Despite this, these stocks appeal to many investors due to their potential stability. It's the classic case of tortoise vs. hare...and many investors prefer to bet on the tortoise.
|Ticker||EPS growth next year||EPS growth next 5 years|
Interestingly, CAG profitability (table below) is relatively low when compared to some of its peers. However, this comparison should be adjusted for the various debt levels across companies (second table below). CPG, for example, has a debt-to-equity ratio of 2.23 vs. CAG's 0.64. Based on this, CAG has relative financial flexibility, and a little additional leverage could actually help improve CAG's profitability.
|Ticker||Operating Margin||Return on Assets||Return on Equity|
Disclaimer: Data Source: Finviz. This is not advice. While the author makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.