Food Companies Use Cost Savings to Drive Q1 2010 Earnings

by: Rick Shea

Q1 2010 earnings are in for many of the top food companies and earnings results continue to be strong despite a tough competitive environment. Food companies are using a combination of lower commodity prices and increased productivity to driving average earnings growth of 20%+. While not as sexy as real unit growth, improved productivity can drive lasting earnings growth. Most of the top performing food companies have ongoing cost saving programs that include sku rationalization programs,distribution and supply savings and marketing and trade spending efficiency.

Cost savings programs are critical because lower commodity costs are fleeting and not totally under managers control. Counting on them for investor confidence is tenuous at best. Price competition is here to stay and the best performing companies are ones that drive costs lower and reinvest those savings in growing sales. Pricing power should return in the 2nd half of 2010 with commodities expected to have a slight upward bias.

Private label companies continue to perform well.

  • Treehouse Foods (NYSE:THS) reported strong adjusted earnings growth of 44% with sales growth of 11% (somewhat driven by the acquisition of Sturm Foods. North American Grocery was + 4% with strength in pickles,dressings and salsa.
  • American International Pasta(AIPC) delivered EPS growth of 44% as well but did it on a -10% decline in sales, Favorable commodity prices and ongoing sku rationalization led to strong earnings results despite lower sales. Private label pasta continues to be a favorite of economically challenged consumers.

However, branded food companies are not conceding anything and have delivered their own strong earnings results.

  • Kelloggs (NYSE:K) achieved +30% EPS growth with topline sales growth of +5%.While the cereal market remains challenging due to price competition from Ralcorp (RAH), their international and US snacks divisions turned in strong sales growth. Kelloggs has embarked on a very ambitious $1B cost cutting program.
  • Sara Lee (SLE) delivered a strong +32% gain in earnings despite total sales being flat for the quarter. The retail meats segment led by Hillshire and Jimmy Dean led the company. Their US bakery division continues to struggle with sales down -5.5% and net margins of less than 1%. Competition from Flowers (NYSE:FLO), Bimbo Bakeries and Hostess brands continues to hurt profits.

Other key branded food companies results include :

  • General Mills (NYSE:GIS) +15% EPS on +3% sales growth
  • Unilever (NYSE:UN) +33% EPS on +8% sales growth
  • Green Mountain (NASDAQ:GMCR) +114% EPS on +68% sales growth. (Wait for the proper entry point on this company due to valuation.)

Going forward, the right food companies provide some safety and defense throughout what is likely to be a turbulent summer for stocks. Negative news on oil spills, senate hearings and the Greek debt crisis have made safety in stock choices more in vogue for the summer of 2010. Many food companies are at relative attractive valuations and should provide some nice stability to your portfolio.

Disclosure: No positions