Although the food and beverage industry has the reputation of being recession-proof, even its companies are suffering through the current economic downturn. The new year brings new challenges and opportunities to investors and product developers alike.
The year 2008 ended with Pilgrim’s Pride Corp., Pittsburg, Texas, entering Chapter 11 bankruptcy protection and its two top executives exiting the company as part of the deal. Also in animal protein, Tyson Foods Inc.’s CEO Dick Bond stepped down suddenly, as the Springdale, Ark., company reported a $198 million loss for its first quarter 2009, which ended Dec. 27, 2008.
On the other hand, Interstate Bakeries Corp., Kansas City, Mo., in reorganization since September 2004, is scheduled to emerge from bankruptcy protection any day now.
To cut costs, Kraft, announced in October it was cutting 400 jobs, or 1 percent of its North American work force. Sara Lee said in December it would cut 700 jobs to bring $200-250 million in savings in the next three years.
Obviously, there’s a rough road ahead, even for food and beverage companies. Which ones are positioned to weather it better?
“Not all companies in the sector are making money now, but investors like food stocks because they're relatively immune to tough times,” says Christopher Shanahan, research analyst at Frost & Sullivan (www.frost.com), San Antonio, Texas. Fluctuating ingredient costs hampered food makers’ profits in 2008, but grocery stores had higher traffic, a trend that helped shares of some companies with private label business, a Frost & Sullivan report said.
Food companies are benefiting from economic woes as Americans eat at home more often.
Balance sheets for most are relatively strong, and falling commodity prices are a plus. The knock on the group is that it has a boring profit outlook: Analysts typically see annual earnings-per-share gains of 5-9 percent. While not stellar in most years, those look pretty attractive today.
So a little perspective is in order. U.S. food stocks lost 28 percent in 2008, according to the Dow Jones U.S. Food Producers Index. In the same period, the Dow Jones Total Market Index lost 40 percent and the Standard & Poor’s 500 lost about 39 percent.
Even though General Mills Inc.’s stock price ended 2008 at $60.75, below the year’s high of $70.06 (on Sept. 19), the Dec. 31 price was 8 percent higher than it was on the first trading day of 2008. In late December, the Golden Valley, Minn., company reported figures for its second quarter of fiscal 2009, ending Nov. 23, 2008. Despite all the bad news from Wall Street, General Mills sales were up 8 percent in the quarter (to $4.01 billion) from the second quarter of 2008, and “segment operating profits” were up 9 percent (net earnings were down 3 percent, although still a healthy $378 million).
Analysts say they like General Mills’ focus on cost-savings and creating new products, which helps keep consumers wanting its brands (mainstays such as Cheerios, Yoplait and Pillsbury), even though they look for less expensive alternatives to many other products.
Some investors are looking harder at large-cap stocks, such as Coca-Cola and Kraft, which pay a healthy dividend yield at a low risk of being cut significantly.
Even as food costs rose in mid-2008, trends were good for food makers. As cash-strapped consumers looked to save money — grappling with their budgets amid job cuts and record-high gas prices — they turned more to grocery stores and away from pricier restaurants. The increased traffic in groceries created a bigger market for food makers expected to continue as long as consumers are trying to stretch their budgets.
Roller coaster commodity costs
Many issues marred profits for food makers in 2008. At mid-year, the main culprit was the cost of ingredients. The price of everything from corn and wheat to oil rose to record highs over the summer. Many food makers successfully raised prices to offset the costs. Some tried to hedge their ingredient purchases to save money, but that hurt in the long run, as the cost of commodities dropped in the fall.
Costs were particularly troublesome for meat producers. In the same boat as Tyson and Pilgrim’s Pride, pork producer Smithfield Foods Inc., Smithfield, Va., saw its stock value fall about 54 percent last year.
Speaking generally of commodity-sensitive food stocks, “We believe the market has unduly punished these stocks over the past four months,” says Chris Lynn, president and chief investment officer of Milwaukee-based JC Investment Management (www.jcinvests.com). “Relative to other equity sectors, the food & beverage companies are well positioned to weather what we believe will be a continued equity market downtrend.
“Year-over-year results for these companies will be favorable due to the dramatic decline in raw materials cost,” Lynn continues. “Transport costs are way, way down. Corn prices are down and we expect that they will continue to be cut in half in six months [when making year-over-year comparisons]. Packaging costs that are so heavily dependent on oil in one form or another — like cellophane and paperboard — are going to be much lower.”