This hasn't exactly been a banner year for many food companies. While a few, most notably Danone (NYSE: DA ) , have seen their stocks rise, many others have seen flat-to-down performance. And it's not like the underlying businesses have been going gangbusters, either, as modest top line growth has combined with rising operating expenses.
Such would seem to be at least partly the case for cereal and packaged foods company Kellogg (NYSE: K ) . While sales were up better than 7% in this quarter, operating income grew only 2%, and the reported double-digit increase in net income had more to do with better interest and tax expenses. For the year to date, though, free cash flow growth is roughly tracking operating income growth of about 6%.
While Kellogg's domestic growth has been pretty respectable so far, it appears that management is making some investments to stimulate more growth down the road. Not only is the company investing pretty considerably in promotional spending, but it's also putting muscle into developing new products. Given the sea of seemingly identical cereals, crackers, and cookies on the store shelves, a new stand-out product could certainly be a boon -- particularly if it reduces the need to cut prices to take share from the likes of General Mills (NYSE: GIS ) .
Seeing as the stock is down about 5% of this writing while the overall market is pretty strong, it would seem that the Street didn't care for the sluggish operating performance and/or the fact that management guidance for '06 was a bit below the average estimate. Nevertheless, let's not lose sight of the fact that this is a company with well-known brands and a double-digit return on capital. What's more, it has continued to move forward with debt reduction and share buybacks.
There's no shortage of big food companies to invest in. In fact, you have to look only at Unilever (NYSE: UL ) , Heinz (NYSE: HNZ ) , Kraft (NYSE: KFT ) , and Sara Lee (NYSE: SLE ) -- all Motley Fool Income Investor recommendations -- to find four of the biggest. But I do think Kellogg deserves more than a passing glance, because companies with double-digit ROICs bought at a good price generally pan out over time.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). Nevertheless, he really wishes Kellogg would bring back the frosted green apple Pop Tarts that he remembers from his youth.
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