4 Golden Apples for Every Food Industry Investor

Includes: HSH, K, MDLZ, PEP
by: The Wild Hog
The purpose of this commentary is to provide a list of companies that will make great additions to your portfolio, no matter your preference for risk or overall investment experience. I will begin with my usual macro-analysis and then outline an industry that is certain to benefit from improved consumer demand across the globe: Food.
There may be some concerns against investing in companies that manufacture and produce food. Concerns could range from poor production and packaging to unhealthy recipes. However, I can tell you that countries across the globe are taking steps to improve regulations related to food processing and packaging. China is amending current laws as the U.S. and Europe take steps to improve food processing as well. With obesity rates rising, companies are being forced to manufacture and develop recipes to promote healthier eating. Additionally, as people become overweight, their health tends to decline. Costs for medicine and insurance are typically higher, which in turn constrain monthly budgets. That being said, I certainly think the consumer will shift towards organic and low-fat diets to prevent the above-mentioned burdens.
To respond, producers have adjusted formulas (as mentioned above) and revealed new package labeling. Phrases such as low-fat or low carbs will typically catch the eye of the consumer. In January, the Food Marketing Institute unveiled a new program called "Nutrition keys" aimed at listing calories, salt, saturated fat, and sugar on the front of packages.
Now that we have some background on the Food industry's improving standards, let's visit the overall economic conditions. Over the past few months, the economic data has vastly improved (save housing and some employment data). Most importantly, production and manufacturing have surged higher led by improved consumer demand. Evidence the consumer is returning to the market is certainly a welcome sign. Some may even perceive this as a bullish indicator for equities. To gauge improved consumer confidence, we will examine the monthly University of Michigan's Consumer Sentiment Index along with the Conference Board's monthly release.

*Orange is the Conference Board's index and white is the University of Michigan's sentiment index.
As you can see, both indices have risen sharply over the past few months and are now at multi-year highs. I won't over exaggerate the move, since both are still down from previous years, but the recent rise is something I'd take to the bank. The consumer is coming back into the market, with some more cash in their pockets. Personal income rose 1.0% in January, another positive sign. Additionally, retail sales have been strong, which supports the idea that consumer demand is rising.
Moving along, I want to present you with 4 financially sound companies I think will be the first to benefit from the bounce back of the consumer. All four of these companies would serve as ideal members for any investor's portfolio, whether your goal is dividend yield or long term price appreciation.
Kraft (KFT) -Brand names include, Cadbury, Nabisco, Maxwell House, and Oscar Mayer. KFT remains "confident that we will deliver earnings growth in 2011 that's both ahead of our long-term targets and within the top tier of our peer group." With more than 35% of Kraft's 2010 revenue coming from its snacks division, new and improved marketing and packaging of its products is likely to increase revenue in 2011.
With organic juices, fruit bars, cereals and nuts, Kraft has a wide arrary of organic products. The company's base business organic net revenues "grew 6.5 percent, driven by 4.6 percentage points from volume / mix and 1.9 percentage points from pricing." This is one of the strong points about the company that I admire. It is able to continuously adapt to changing market conditions and consumer demand. With strong growth in North America, Europe, and emerging markets, one will benefit from improved global demand. Additionally, KFT pays a solid 3% dividend and is expected to increase that dividend in the coming quarter. Estimates range as high as $38 per share.
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PepsiCo (NYSE:PEP)-Makers of the soft-drink we all know and love. The company also owns and operates Frito Lays. What makes Pepsi an especially attractive company is its goals of health and public awareness. Pepsi's plans include increasing the amount of wholegrains, fruits, and other healthy food choices in the production of its products. Reducing sodium, saturated fat, and sugar are additional methods of production that continue to distinguish Pepsi from the pack. Pepsi also has a strong 3% dividend. Estimates are as high as $77 a share, with 12 buys.
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Sara Lee (SLE) -Mostly a beverage distribution company, but also dabbles in the meat and bakery industries. It should be noted that the company will be divided into two publicly traded companies (1 domestic and 1 international) and will pay a 1-time dividend per share of $3. The ex-dividend date had not been announced. The North American retail and meat business will retain the Sara Lee name and the beverage and bakery business have been internally called "CoffeCo" for now. The split of the company should be completed by 2012.
Since most of the company's revenue comes from the beverage and bakery units, I would suggest purchasing the new spinoff for its growth prospects and potential dividends. But for the next year, a solid 2% dividend yield is sufficient enough for me.
Kellogg (NYSE:K) is one of my favorite companies. It provides a solid dividend and makes generally healthy cereal. Although 2010 was a tough year, 2011 will surely be an improvement, especially with consumer preferences shifting toward healthier nutrition. Estimates are as high as $61 a share.
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I realize there are some headwinds facing this industry. Of course, higher costs and unemployment will certainly not help any of the above mentioned companies. But they also won't help any other company either. After reviewing their long term strategies and growth prospects, these 4 firms are solid investments for anyone's portfolio.

Disclosure: I am long PEP.

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