* All data are as of mid-day Wednesday, December 3, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
Although food items generally fall into the consumer staples category, as does the Food Wholesale industry, some companies within the category can behave much like consumer discretionaries for the types of foods they distribute.
As the economy continues its recovery and consumers feel more financially empowered, they tend to splurge a little on the more exotic or perhaps even more extravagant food stuffs. This can be clearly seen in the performances of the nation's three largest Food Wholesale companies: Sysco Corporation (NYSE: SYY) - distributor of basic fresh and canned foods; The Hain Celestial Group, Inc. (NASDAQ: HAIN) - distributor of basic, organic and natural foods; and United Natural Foods, Inc. (NASDAQ: UNFI) - distributor of basic, organic, natural and specialty foods.
As a general rule of thumb, the more exotic or unconventional the product line is, the more discretionary-like the company will perform, even if it is categorized as a staple. Hence, we would expect carriers of organic, natural and specialty foods to outperform the more conventional food distributors in a period of growing consumer confidence. And that is precisely what we have been seeing since the economic recovery began some 5.5 years ago, as graphed below.
Since the start of the recovery in March of 2009, where the broader market S&P 500 index [black] has gained 205% and the SPDR Consumer Staples Sector ETF (NYSE: XLP) [blue] has gained 152%, basic food distributor Sysco [beige] has gained 107%, while organic and specialty food distributors United [orange] and Hain [purple] have gained a tasty 430% and 910% respectively.
On an annualized basis, where the S&P has averaged 36.18% and the XLP has averaged 26.82%, Sysco has averaged 18.89%, United has averaged 75.89%, while Hain has averaged an exotic 160.59% per year!
Looking forward, the Food Wholesale industry looks set to continue sprouting its earnings higher than the broader market's average as tabled below, where green indicates outperformance while yellow denotes underperformance.
Over the immediate term, the industry's earnings are expected to grow at some 3.59 to 4.86 times the S&P's average growth rate, before settling to a more sustainable 1.42 to 1.43 times the rate longer term.
Zooming-in a little closer, the three largest U.S. companies in the space are expected to split perform still along the lines of the products they carry, as tabled below.
Over the current quarter, where basic foods distributor Sysco is seen under-growing the broader market in earnings straight across the calendar, specialty foods distributor United does much better, though still struggling near term before growing robustly longer term.
The other specialty and organic foods distributor Hain, however, is seen outgrowing all, broader market and peers alike.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Hain posted the greatest revenue growth year-over-year, while United reported the greatest earnings growth. At the low end of the scale, Sysco and Hain split the slowest growth between them, with both reporting earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Hain operated with the widest profit and operating margins, while United contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Sysco's management team delivered the greatest returns on assets and equity, while Hain's team delivered the lowest returns.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Sysco provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Hain's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Sysco's stock is cheapest relative to forward earnings, while United's is cheapest relative to company book value and 5-year PEG. At the overpriced end of the spectrum, Hain's stock is the most overvalued relative to forward earnings, while Sysco's is the most overvalued relative to book and PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Sysco offers the highest percentage of earnings over current stock price for all time periods. At the low end of the scale, United offers the lowest percentages over the immediate term, while Hain's offers them over the longer term.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Hain offers the greatest growth in all time periods, while Sysco offers the slowest growth in all periods.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Hain's stock offers the greatest upside potential and least downside risk, while United's stock offers the least upside and Sysco's offers the greatest downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Hain is best recommended with 5 strong buys and 6 buys representing a combined 73.33% of its 15 analysts, followed by United with 9 strong buy and 4 buy ratings representing 68.42% of its 19 analysts, and lastly by Sysco with 0 strong buy and 1 buy recommendation representing 7.14% of its 14 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Hain with slightly more green shoots, outperforming in 13 metrics and underperforming in 11 for a net score of +2, followed close behind by Sysco, outperforming in 12 metrics and underperforming in 13 for a net score of -1, with United in close contention, outperforming in 6 metrics and underperforming in 8 for a net score of -2.
Where the Food Wholesale industry is expected to outperform the S&P broader market significantly this and next quarters, and meaningfully in 2015 and beyond, the three largest U.S. companies in the space are expected to split perform in earnings growth according to their product lines, with basic foods distributor Sysco growing the slowest, while organic and specialty foods distributors United and Hain grow more robustly.
Yet after taking all company fundamentals into account, Hain Celestial Group promises to help investors reap more heavenly potential returns given its highest trailing revenue growth, widest profit and operating margins, highest EBITDA over revenue, highest future earnings growth over all time periods, best price targets, and most analyst buy recommendations - narrowly winning the Food Wholesale industry competition.
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