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

Is the investment potential of American food companies limited by market saturation?

Feb 22, 2014 at 8:00AM

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.

Ready to watch your portfolio rise? Take David Gardner's advice
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

William Bias has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information