ConAgra, General Mills, and Mead Johnson Nutrition: 3 Companies to Watch

Legendary investor, Peter Lynch said to "invest in what you know." With that said, investors looking for investment ideas may want to consider companies that make and sell items such as food, cereals and snacks, and children's nutrition products made, sold, and distributed by ConAgra (NYSE: CAG  ) , General Mills (NYSE: GIS  ) , and Mead Johnson Nutrition (NYSE: MJN  ) , respectively. Companies that make such staples are less likely to become obsolete; however, other factors need to be considered before pushing the buy button, and here's why.

Two mature companies 
ConAgra sells food under popular brands such as Hunt's, Marie Callender's, and Slim Jim. Overall, ConAgra reported sales and net income increases of 26% and 18%, respectively, in the most recent quarter.  However, upon closer examination, all is not well. In the most recent quarter, the company reported flat sales in its consumer foods segment versus the same time last year, due to even volume. Its commercial foods and private brands segments gained in sales but mostly due to acquisitions .

Investors should always want to see sales increases due to increased volume based on demand and popularity, not "bolt on" increases stemming from acquisitions. On ConAgra's balance sheet, cash comprises 4% and long-term debt comprises 158%, which leaves you wondering if the company can invest in new products and expand infrastructure globally. ConAgra paid out a steep 90% of its year-to-date free cash flow in dividends based on the latest earnings release; however, if it can't find proper business reinvestment opportunities, then maybe it should return most of its cash flow back to investors. Currently, ConAgra pays its shareholders $1 per share per year, translating into a yield of 3.4%.

General Mills sells cereals, snacks, and other food products under highly recognizable brands such as Cheerios, Lucky Charms, Go-Gurt, Pillsbury, and Betty Crocker.  In the most recent quarter, General Mills' revenue essentially remained flat versus the same time last year. Lower volume and sales in the domestic and convenience store markets were counterbalanced by slightly higher volume and sales in international markets.

General Mills definitely faces market saturation and needs to focus more heavily on product innovation domestically and territorial expansion abroad in order to grow top and bottom lines over the long term. General Mills' balance sheet got a little worse as of the most recent quarter, with long-term debt to equity equating to 95% of stockholder's equity versus 75% the same time last year. Its cash equates to 11% of stockholder's equity. General Mills paid out 66% of its year-to-date free cash flow in dividends. Its $1.52 annual payment per share to shareholders also equates to a 3.2% yield.

Growing but with foreign risk
Mead Johnson Nutrition sells children's nutrition products under the names Enfamil, Enfagrow, and Choco Milk. In the most recent quarter, Mead Johnson grew its revenue and net income 8% and 14%, respectively.  In contrast to ConAgra and General Mills, it grew top and bottom lines via market share and volume gains stemming  from increased demand for its product. Volume contributed 6% to overall revenue growth in the most recent quarter. However, Mead Johnson Nutrition's sales and volume declined 5% and 8%, respectively, in its "mature" combined segments of North America/Europe. Most of the company's growth came from Asia and Latin America, with volumes growing 16% and 6%, respectively, in the most recent quarter.

Moreover, the largest chunk of Mead Johnson Nutrition's revenue, 47%, came from the Asian markets. In fact, 68% of its revenue comes from economies outside North America and Europe. This means Mead Johnson will face foreign risk in the form of potential government upheavals and foreign currency fluctuations. The company has demonstrated its seriousness in financial management by lowering debt by 34% in 2013; however, its long-term debt-to-equity ratio still resides at a stratospheric 336%.Mead Johnson Nutrition's dividend-to-free cash flow ratio was 47% in 2013. The company pays shareholders $1.36 per share and yields 1.8%.

Foolish takeaway 
On the whole, Mead Johnson Nutrition possesses the most potential as an investment. By contrast, ConAgra and General Mills may work best as a dividend play in an income-oriented retirement account. Businessweek estimates Mead Johnson's revenue will grow 7% in 2014 versus 2013. Businessweek estimates growth of 14% for ConAgra in 2014 but this probably stems from the Ralcorp acquisition. Looking further ahead to 2015, ConAgra's revenue is expected to decline slightly versus 2014. Businessweek also estimates 2% growth for General Mills in 2014.  Feel free to add these companies to your Motley Fool Watch List.

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