The investment community’s attitude toward food and beverage processing is, at best, cool.
Solid but stolid sums up the Street’s view of publicly traded food companies. Sure, many food corporations are consistently profitable and deliver products indispensable to human life, but they lack the sizzle investors love.
In its most recent ratings on 97 industries, Value Line investment survey placed the food industry in the bottom quartile of buy recommendations, ahead of metal fabrication and toiletries but far behind glamour industries like automotive and coal.
Food has some fans, however, including the sometimes-contrarian Warren Buffett. Buffett ponied up almost $12.25 billion of Berkshire Hathaway’s money to get a 50 percent stake in H.J. Heinz, a center-of-the-store mainstay and one of the oldest food processors in the world. In his annual letter to shareholders of Berkshire Hathaway in February, the oracle of Omaha wrote, “Our partnership took control of Heinz in June, and operating results so far are encouraging.” He closed with the forecast, “Earnings in 2014 will be substantial.”
If investors are often indifferent, fund managers can be darn’ right hostile. Ralcorp brushed off ConAgra Foods’ acquisition overtures for a year but finally caved under pressure from hedge fund manager Keith Meister, claimed a seat on the board after purchasing 2.8 million shares of Ralcorp stock. Fund manager Nelson Peltz thinks Pepsico would be better off dumping its eponymous brand. And hedge-fund advisor Sandell Asset Management wants Bob Evans Farms Inc. to focus on its restaurant business and get rid of BEF Foods, the vertically integrated corporation’s food processing division.
Wall Street opinions aside, the food and beverage industry appears to have a upbeat view of itself, at least for the current year. As in years past, we collected capital spending data from 37 of the largest food and beverage companies and come up with a projected 14.8 percent increase this year. That estimate may be based on only 37 companies, but these are some of the biggest in the business and our survey found $18.5 billion in budgeted funds.
Many publicly traded food companies express their capital expenditure budgets as a percentage of net sales, typically in the low single digits. Bob Evans continues to ramp up a capital spending boom that began in 2010 and is set at 13 percent of net sales this year. A good chunk will spruce up the firm’s Bob Evans and Owens restaurants, but about $100 million since 2011 has bolstered manufacturing capacity and capabilities in a retooled network of four production facilities. Bob Evans' 2014 capital budget is 39 percent higher than 2013 spending and three times larger than 2012 outlays.
Reinvestment in production is becoming fashionable throughout the industry. Capital spending plans in 2014 at 35 food companies are up 14.9 percent over 2013 spending and up 26.2 percent over 2013 budgets. That may be more a reflection of a slow-growth 2013 than a bullish 2014. Capital spending budgets at 18 companies tracked since 2011 are only 3.3 percent bigger than they were two years ago.
Food Processing’s annual Manufacturing Trends Survey provides a wider marker of CapEx plans. Two out of five respondents expected capital spending to be flat at their plants this year, one in 10 was bracing for declines, and half said spending would be up this year, with most expecting to have at least 5 percent more to work with.
A bonus depreciation allowance in the tax code expired Jan. 1, although financial lenders discount the break as a project-driver. “We’re probably seeing a pick up in CapEx,” says Chris Nay, senior managing director-food and beverage in the Chicago office of GE Capital Corporate Finance “Food safety improvements and efficiencies are driving the day, along with sustainability projects” to goose suppliers’ rankings in retailers’ sustainability indexes.
Food company balance sheets are generally strong, and when they seek financing, they are finding lenders “clamoring for food assets” and offering favorable terms, he says.
Go East, hop head
Growing demand drives capacity expansion, and companies blessed with in-demand products are leading brick-and-mortar activity. Seafood, poultry, health-and-wellness products and craft beer are among the most active categories, and that’s reflected in projects recently completed or under development.
Heart-healthy omega-3 is in demand, and that’s making seafood processing a booming sector. A record 1,000 exhibitors were on hand in Boston last month for the annual Seafood and Seafood Processing Expo. “There is a huge push in the food industry to get heart-healthy ingredients into products,” observes Bob Graham, vice president-food and consumer products group at the Austin Co. in Atlanta. This year’s Boston show was multiple times larger than it was pre-recession, he reports.
Likewise, poultry processors are gearing up to meet demand that is forecast to increase 2.5-4 percent this year. Sanderson Farms canceled plans to build in North Carolina two years ago, in part because skyrocketing feed prices distorted the business model. Corn prices have receded from their peak, and now it’s full steam ahead on a $170 million new operation in Palestine, Texas, that will add 15 percent capacity for Sanderson.