The packaged food industry has been facing serious headwinds lately. Let's take a look at some of those factors that most dramatically contributed to industry woes.
- Commodity prices have risen throughout 2011.
- High unemployment rates persist domestically.
- Overall consumer spending remains weak.
Yet, hard times can shake out the real winners in an industry, and a few companies have shone through in the face of these conditions. Here is a quick industry take, three big-name stocks, and my opinion on which is best positioned for success.
View from 10,000 feet
Companies have gotten creative in their management of higher commodity costs. Since customers are generally more sensitive to changes in price than changes in quantity, many companies opted to produce smaller portions while keeping price unchanged. This, in effect, allowed companies to pass on higher commodity prices without having to visibly charge more. However, the inverse is rarely true of good economic times, when consumers rarely see lower prices on the shelves. Instead, the gains are translated into improved margins for companies. This could spell big gains down the road if commodities ease.
With that, let's take a look at three companies to decide if they're well positioned going forward.
ConAgra Foods (NYSE: CAG ) -- Unfortunately, even if ConAgra ups their margins, they'll still significantly trail their food industry peers. Their most recent EBITDA margin of 9.5% is 20% lower than the same quarter last year, and falls short of competitor Kraft's (NYSE: KFT ) 16.6% margin for the same period. ConAgra, generally, does not have the same brand strength as many of their peers. They therefore have been unable to pass on higher prices as well as their competitors. ConAgra has recently sought to combat this problem with an attempted takeover of Ralcorp, maker of brands like Post Cereal. But Ralcorp refused to be courted. I'm not encouraged by this, as persistently poor margins and difficulties picking up stronger brands likely means ConAgra probably won't benefit as much as competitors if commodity prices ease.
General Mills (NYSE: GIS ) -- In an industry where purchases are largely brand-driven, General Mills is top dog in its sectors. Pillsbury and Haagen-Dazs, both purchased from Diageo (NYSE: DEO ) in 2001, are rocking and rolling in their markets. Pillsbury accounts for almost 70% of the refrigerated baked-goods category, Haagen-Dazs is sold in more than 60 markets, and Cheerios accounts for 12% of sales in the ready-to-eat cereal category. This is double cereal competitor Kellogg's (NYSE: K ) best-selling Special K cereal, which has a 6.1% market share. Also, General Mills recognizes the opportunity overseas, and has placed huge emphasis on emerging markets for future cereal growth. There is good reason, as Russia's ready-to-eat-cereal consumption has tripled in the last decade alone. General Mills is now sold in more than 100 countries, including China and Eastern Europe. While their 3.2% dividend yield isn't the highest here, it's still an added sweetener for shareholders.
B&G Foods (NYSE: BGS ) -- B&G CEO David Wenner piqued my interest when he recently stated that B&G's acquisition of Culver Specialty Brands from Unilever was "consistent with B&G Foods' acquisition strategy of acquiring smaller, high-margin brands." It certainly shows, as B&G's EBITDA margin is the envy of the packaged food industry at a lofty 23.4%. Culver, whose labels include spice maker Mrs. Dash, is expected to immediately add to B&G's earnings. However, this also means B&G will now be competing directly with the world's largest spice maker, McCormick (NYSE: MKC ) . The company just upped its dividend and is now offering a 4.43% yield, and with a payout ratio of less than 50%, it seems sustainable.
However, B&G seems to have ridden this enthusiasm a bit high for me. Shares are up 25% in the last month, and their P/E ratio is the loftiest of the group. Personally, I like to see more international exposure, and B&G primarily serves the U.S. and Canada. Lastly, the effects from their most recent price increases have yet to truly be seen as they just went into effect on Sept. 1. Overall, I feel this is a strong company, but after the stock run-up and price increases, I'm in "hurry up and wait" mode.
If commodity prices ease going forward, companies that have been able to successfully pass previous price hikes onto consumers, like General Mills, will likely benefit. I like their brand strength and international exposure. I also like B&G Foods, but would wait for a pullback before I consider owning any myself. Of the companies mentioned here, General Mills is my pick.
Agree? Disagree? Please feel free to let me know in the comments section below. And be sure to add these three companies to your watch list to see how they manage commodities prices going forward.