Stocks Featured: ADM, BG, CALM, CAG, FDP, GIS, HSY, K, KRFT, MKC, MJN, MDLZ, TSN, UN.
As we survey recent performance across the Food Products industry (large, small), a number of firms continue to struggle to squeeze out modest growth, while others are putting up rather impressive organic top-line and adjusted earnings expansion.
Perhaps the strongest fundamental performer in the group has been meat-processor Tyson Foods (TSN), which recorded impressive bottom-line growth in its fiscal third quarter, released August 5, as operating income in its ‘Chicken’ segment jumped 38% thanks to increased domestic/international production and strong pricing. The company’s fiscal 2014 outlook also speaks to robust chicken production and lower input costs, and we expect the strong top- and bottom-line performance to continue. Tyson Foods has been a 9 on our Valuentum Buying Index for some time and represents one of our best valuation calls within this industry group (following its recent upward advance). Though we think modest valuation upside remains, commodity cost fluctuations can make earnings quite volatile.
Packaged food company ConAgra’s (CAG) fourth-quarter performance, released June 27, was also solid, with sales in its ‘Consumer Foods’ and ‘Commercial Foods’ segments advancing 7% and 3.5%, respectively. The company managed to leverage each segment’s sales expansion into 7.9% and 13% growth in operating profit, respectively. ConAgra also benefited from the recent acquisition of Ralcorp, and the firm increased its expectations for synergies related to the transaction. All in, ConAgra is targeting comparable annual earnings-per-share growth of 10% per year through 2017, which will put it beyond $3 per share at that time. If the company’s recently-reported performance is any indication of the likelihood of achieving such an expansion target, the firm is in great shape. Adjusted earnings per share leapt 17.6% in the period. We’re keeping a very close eye on ConAgra, though its shares are trading in line with our estimate of their intrinsic value.
Another firm that caught our eye during the second quarter was chocolate-maker Hershey Foods (HSY). The firm’s top-line growth and operating-income expansion was robust during the second quarter (results released July 25). Management is expecting 7% net sales growth during 2013 and an impressive 220-230 basis points of gross-margin expansion in the year. In an environment where others are fighting to offset input-cost inflation, Hershey has things under control better than most (though cocoa costs can be volatile). The firm continues to take market share and indicated it is seeing ongoing strength in all segments of its US business: chocolate, non-chocolate, mints and gum. Investors have to pay up to own Hershey though — it’s stock is overvalued (at the time of this writing), in our view.
Fourth-quarter performance of the largest producer of shell eggs in the US, Cal-Maine’s (CALM), released July 29, showed 25% adjusted earnings expansion. The company’s focus on specialty shell eggs is yielding results, as specialty-shell-egg volumes jumped 7.8% during fiscal 2013, while specialy-shell-egg selling prices advanced 6.1% for the year. Specialty shell eggs include nutritionally enhanced, cage free and organic eggs and have become a larger segment of the overall egg market in recent years. Though non-specialty egg prices will continue to be cyclical/volatile, we’re huge fans of the less-cyclical/less-volatile specialty-egg pricing strength, and we expect these higher-priced eggs to continue to gain share in the marketplace. Sales of specialty eggs account for about 16% of Cal-Maine’s total number of eggs sold and about 24% of its shell egg revenue. We like recent trends, but the firm’s shares look a bit pricey as well (at the time of this writing).
Perhaps the biggest disappointment in the period was Kraft Foods (KRFT). The firm’s second-quarter results, released August 1, showed a 1.2% decline in organic revenue and nearly a 13% drop in adjusted operating income. Though we admit the firm has a tremendous opportunity to improve profitability in coming years, as its adjusted operating income margin remains middle-of-the-road versus peers, fundamentals are clearly moving in the wrong direction. Strategically reallocating advertising resources and leveraging its sales capability are two sources for profit improvement, but we’re not seeing the firm successfully execute on these initiatives. All in, we’re not compelled to own shares and think its dividend yield (about 3.6% at the time of this writing) is artificially keeping its price above our estimate of its intrinsic value.
General Mills (GIS) and Kellogg (K) continue to chug along, posting relatively flat top-line performance in their most recently-reported quarters. Both are experiencing low- to- mid-single-digit operating earnings expansion, and we don’t think the trajectory will change much in coming periods–though share buybacks may make results look a bit better on a per-share basis. This may come as a surprise, but we’re not fans of the long-term dividend health of either company on the basis of their poor Valuentum Dividend Cushion scores.
We were a bit puzzled by flavor-company McCormick’s (MKC) upwardly-revised outlook, given its weak underlying performance in its second quarter (results released June 27). Second-quarter net sales advanced only 2% in the period, though the company upped its 2013 sales target by one percentage point to the range of 4%-6%. Operating income has fallen through the first six months of 2013, but McCormick still plans to hit its operating income growth target of 5%-7% for the year. Mondelez (MDLZ), which reported second-quarter results August 7, is also putting a lot of weight on performance in the back half of the year, with expectations for revenue and margin expansion to accelerate. The company’s organic net revenue growth through the first six months of the year has been less than 4%, though the firm is expecting full-year expansion of 5%-7% (despite indications that some markets are slowing). We wouldn’t be surprised if McCormick and Mondelez disappoint in the back half of the year.
Valuentum’s Take
All things considered, we think Tyson, ConAgra, Hershey, and Cal-Maine are performing the best on a fundamental level as of late. However, Hershey and Cal-Maine are far from cheap, ConAgra looks fairly priced, and Tyson has already made a large move toward our fair value estimate. The group is well-known for its dividend payers, but we’re not huge fans of the long-term health of Kellogg’s or General Mills’ respective yields (currently just under 3% at the time of this writing), nor do we like current fundamental trends at high-yielder Kraft at this juncture. And as we gear up for the back half of 2013, McCormick and Mondelez may be setting investors up for a disappointment. We’re keeping a close eye on the industry, but we’re not ready to pull the trigger in our Best Ideas portfolio on any constituent at this time.
Select Food Products Industy Constituents
| Recently-Reported Quarterly Performance Statistics | ||||||
| Company Name | Organic Revenue Growth YoY% | Adjusted Operating Income Growth YoY% | Adjusted Net Income Per Share Growth YoY% | Management’s Outlook & Commentary (source: company press releases, conference calls) | Link to Quarterly Release | |
| Archer-Daniels Midland (ADM) | -0.6% | 18.9% | 21.1% | Managing Through Tight Crop Supplies: “The team managed well through this period, as tight U.S. crop supplies reduced volumes. Also, corn results improved amid volatile ethanol industry conditions. During the quarter, we continued our work to improve the company’s future returns and earnings power over the cycle. Our effort to unlock cash reached $2 billion, with the team reaching this milestone a half-year ahead of schedule. And, in cost, we made solid progress toward our goal of $200 million in additional cost reductions by the end of 2014. Looking ahead, we’ll be managing through tight crop supplies until the forecast large but delayed U.S. harvest.” | ADM Reports Second Quarter 2013 Earnings of $223 Million or $0.34 per Share, Aug 6 | |
| Bunge (BG) | 6.8% | -15.5% | -35.7% | Expecting Recovery in Weak Agribusiness: “We are confident about the second half of the year. In agribusiness, export demand for agricultural commodities should be strong due to the combination of lean customer inventory pipelines resulting from delays in exporting product out of South America, and lower prices driven by what are expected to be large new crops in the Northern Hemisphere. Farmer selling in South America has picked up, supporting near-term oilseed processing margins. Our oilseed processing and merchandising operations in North America and Europe will continue to be impacted by low capacity utilizations due to tight supplies until new crops are harvested. While the critical growing period is still in front of us, U.S. soybean and European softseed crops are developing well, supporting good forward processing margins in these regions.” | Bunge Reports Second Quarter 2013 Results, July 25 | |
| Cal-Maine (CALM) | 4.6% | – | 25.0% | Specialty Eggs Driving Earnings Growth: “Specialty eggs have been an important area of strategic focus for Cal-Maine and, as a result, we achieved a 7.8 percent increase in specialty egg volume for the year and a 6.1 percent increase in specialty egg selling prices. Overall, our average selling prices were up 7.9 percent in fiscal 2013. We expect specialty eggs, which have a higher retail selling price, will continue to gain market share over regular eggs as more consumers are willing to pay for these premium products. Our operations have continued to run well in fiscal 2013, in spite of experiencing higher and more volatile feed costs primarily related to a tight national corn supply. For the year, our feed costs per dozen were up 15 percent compared with fiscal 2012, and the higher input costs adversely affected our gross profit margins…Looking ahead, we are cautiously optimistic about the yield of this year’s corn and soybean crops which could provide some relief to our feed costs in fiscal 2014.” | Cal-Maine Foods Reports Fourth Quarter and Fiscal 2013 Results, July 29 | |
| ConAgra Foods (CAG) | 5.7% | 9.6% | 17.6% | Expecting Double-Digit EPS Growth: “After the strong fiscal 2013 performance from the Commercial Foods segment, we will be dealing with some profit headwinds related to that segment in fiscal 2014, and we expect to manage through these and still post very good EPS growth for the fiscal year. As we look to the longer term, given the opportunities ahead of us, we expect to grow comparable EPS by at least 10% per year from fiscal 2015-2017; this is expected to result in five consecutive years of double-digit EPS growth, and EPS in excess of $3.00 per share in fiscal 2017.” | ConAgra Foods Reports Strong Fourth-Quarter EPS Growth & Good Consumer Foods Segment Volume Performance; Ralcorp Synergy Estimates Increased & Expected to Help Drive Double-Digit Annual EPS Growth Through Fiscal 2017, June 27 | |
| Fresh Del Monte (FDP) | 6.9% | -10.9% | 1.0% | Gross Margin Pressures: “Gross profit decreased $3 million to $35 million, compared with gross profit of $38 million a year ago. The decrease was primarily due to higher production and procurement cost of fruit from Central America. Total worldwide banana unit costs increased 4% compared with last year’s second quarter. In our other fresh produce business segment, net sales increased $24 million to $478 million, compared with $454 million in the second quarter of 2012. And gross profit was 6% lower than the prior year period.” |
Fresh Del Monte Produce Inc. Reports Second Quarter 2013 Financial Results, July 30 | |
| General Mills (GIS) | 1.0% | 6.0% | 5.1% | Only Very Modest Growth Expected: “In total, we expect our net sales to grow at a low single-digit rate in 2014 to exceed $18 billion. General Mills said that strong holistic margin management efforts companywide are expected to offset input cost inflation, estimated at 3 percent in 2014. The company expects to generate mid single-digit growth in segment operating profit for the year. Fiscal 2014 adjusted diluted earnings per share are expected to grow at a high single-digit rate, to a range of $2.87 to $2.90 per share. Planned share repurchases are expected to reduce average net diluted shares outstanding by 2 percent.” | General Mills Reports Fiscal 2013 Results, June 26 | |
| Hershey Foods (HSY) | 6.7% | 11.5% | 9.1% | Strong Sales Growth, Margin Improvement: “The company expects full-year net sales to increase about 7 percent, including the impact of foreign currency exchange rates. Net sales will be driven by core brand volume growth, Brookside distribution gains and repeat purchases as well as innovation such as Kit Kat Minis, Twizzlers Bites and Jolly Rancher Bites products in the U.S., Hershey’s Mais candy in Brazil, and the fourth-quarter launch of Hershey’s Kisses Deluxe and Hershey’s Drops chocolates in China. Given year-to-date results, greater fixed cost volume absorption and overall input cost deflation, the company now expects 2013 full-year adjusted gross margin expansion of 220 to 230 basis points. As we enter the third quarter, we’re well-positioned to gain market share for the year in the geographies where our resources are focused. We’re on track to deliver another record year of solid net sales growth and a double-digit percentage increase in earnings per share-diluted. We have marketplace momentum in all segments of our U.S. business – chocolate, non-chocolate, mints and gum – and have visibility into our innovation pipeline and key line items within the income statement. The earnings growth, as well as the company’s continued focus on working capital, enables us to generate strong operating cash flow.” | Hershey Announces Second Quarter Results; Updates Outlook for 2013, July 25 | |
| Kellogg (K) | -0.5% | 3.4% | 5.3% | Difficult US Environment; Currency Headwi | ||