3 Food Stocks to Savor: Hershey, Hormel and Tyson

Today we look at three food companies -- Hershey (NYSE: HSY  ) , Hormel Foods (NYSE: HRL  ) , and Tyson Foods (NYSE: TSN  ) (NYSE: HRL  ) -- whose success in growing both sales and earnings proves that it's not so important what kind of foods a company manufactures but whether it can master operational efficiency, attack new markets with zeal, and keep pace with changing consumer preferences.

Finding the earnings sweet spot 
Hershey manufactures and markets chocolate and sugar confectionery products under popular brands such as Hershey, Kit Kat, and Reese's. The company markets more than 80 brands in all.

Third-quarter results were as delectable as the company's products. Net sales rose 6.1% versus the year-ago quarter, and the company said it expects full-year sales growth to come in at about 7%.

CEO John P. Bilbrey stated in the earnings release that, "Hershey is a gross margin focused company." Management certainly had this goal in focus in the third quarter, as the gross margin percentage increased a remarkable 300 basis points to 46.2%. Despite the robust sales growth, the cost of sales actually declined slightly in the third quarter.

The margin increase was due to lower commodity costs, the company's effective supply chain and productivity initiatives, and fixed costs being spread across a larger revenue base.  

When sales are up and cost management is that good, it is not surprising that net income of nearly $233 million was up a spectacular 32% from the same quarter of 2012.

An example of Hershey's innovation was its announcement in October that it was launching a new brand, Lancaster Soft Cremes -- its first new brand as opposed to a brand extension or acquisition of another brand in 30 years. 

The company promises these new caramel products will offer "a rich and indulgent experience." I'd say the company is on the right track. After surviving the Great Recession, we're all ready for experiences like that.

Bringing home the bacon (along with the turkey and the peanut butter)
Hormel Foods is a global manufacturer and marketer of food products, particularly known for its pork and turkey products. The company's familiar brands include Jennie-O turkey, Hormel, good old SPAM, and an iconic brand it acquired last year, SKIPPY.

Sales for the fourth quarter were up 7% year over year to $2.3 billion. The grocery- products segment -- because of the positive impact of SKIPPY sales -- and the international segment reported the greatest percentage sales increases, up 23.3% and 37.9%, respectively.

The segment operating profit grew 20.9% for the company as a whole, as the company's grocery products, refrigerated foods, Jennie-O Turkey Store, and international segments all recorded double-digit increases.

Hormel's earnings before income and taxes jumped 19.4% for the quarter compared to the same quarter last year and reached $239.6 million.

The healthy sales increase, a 40 basis point increase in gross-profit percentage -- indicating outstanding management of cost of goods sold -- and a 102 basis point reduction in selling, general, and administrative costs as a percentage of sales were the drivers of the fine profit performance.

The profit power of protein
Tyson Foods produces protein-based and prepared-food products and is one of the largest processors and marketers of chicken, beef, and pork in the world. The company has customers in 130 countries.

In the fourth quarter, Tyson Foods' sales rose to a record level of $8.9 billion, 7% higher compared to the same quarter of 2012. Sales growth was robust in each of the company's segments. Sales of chicken products rose 6.8%, beef did even better with a 9.1% increase, and pork was 6.3% higher. The smaller prepared- foods segment also has a nice increase, 9.4%.

The company's operating income for the quarter was outstanding, up 17.5% from the year-ago quarter to $416 million.

The gross-profit percentage rose 50 basis points, while selling, general, and administrative expenses held steady as a percentage of sales; so the revenue increase translated into higher operating profit.

What we learned
Tyson Foods is so huge -- its quarterly revenue was nearly $9 billion compared to $1.9 billion for Hershey and $2.3 billion for Hormel -- that it makes the company's ability to grow even more remarkable.

The company's "multi-protein" approach is a great strategy because supply and demand conditions change by the quarter in each of these three markets, so a down quarter in one segment can be balanced out by higher growth and profit in the others.

Hormel Foods' financial performance has been consistently outstanding. Annual sales growth has averaged 6% between 2007 and 2012, with earnings per share growing 11% annually on average over that time.

The company is making strides to capture more international business. One of the strategic reasons for the SKIPPY acquisition was that the brand's established international popularity gives the company a platform to expand the presence of its other brands, including SPAM.

Hormel is also an innovative company, seeking to offer consumers new flavors and foods that fit their changing lifestyle. The company is now selling "Fire Braised Meats," which have an appealing flame-seared flavor. And for the busy consumer on the go, the company now offers REV snack wraps.

Hershey is the dominant player in the U.S. chocolate market with an estimated market share of more than 40%. The company is justifiably proud of its ability to generate "predictable and consistent net sales and earnings growth."

Hershey benefits from what it terms "channel ubiquity," meaning you can find its products in almost any store you can think of from supermarkets to dollar stores.

Hershey is spreading this ubiquity around the globe, as international sales rose to 15.6% of total sales in 2011 compared to 9.8% in 2004. This makes perfect strategic sense because the company believes its U.S. business model can be replicated on a global basis.

So we've seen it's possible to build a highly profitable global food-manufacturing empire based on chocolate and sugar, pork and turkey, or a combo platter of chicken, beef, and pork.

I believe each of these companies could satisfy investors' hunger for quality management and sustained performance excellence. 

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