There Is Money To Be Made In Store Brand Foods

When you shop at your local grocery store, there's a good chance you like to save the most money possible. That usually involves buying store-brand products, which are called private label products. 

Private-label foods have become a fundamental part of supermarkets and grocers business models. This comes as private labels are becoming brands in and of themselves, where grocers are leveraging private-label products to distinguish themselves, including Kroger with the Simple Truth brand and Sam's Club Artisan Fresh brand.

What's the best way to play the niche food market? 
ConAgra Foods (NYSE: CAG  ) is the market leader in producing private-label foods. When it bought Ralcorp in 2012, it became the nation's largest private-label food producer. 

ConAgra makes a number of brand-name items too, including Chef Boyardee, Healthy Choice, Marie Callender's, Orville Redenbacher's, PAM, and Peter Pan. It really caters to the broad food market.

Not only is ConAgra's presence in grocers and retailers impressive, but it also has a presence in the business-to-business market; it sells to restaurants and food-service companies. These items include various vegetables and grain products.

How things are shaping up for 2014
After missing fiscal first-quarter earnings estimates, ConAgra redeemed itself with a 12% earnings beat in the fiscal second quarter. However, a slashing of fiscal 2014 earnings guidance has pushed the stock down to near 52-week lows.

The market has overreacted to the company's news that the benefits of the Ralcorp acquisition might be delayed. Initially, ConAgra was looking for Ralcorp to add $0.25 to earnings in 2014. That number has been revised downward to $0.20.

Still a cheap income stock
One aspect of ConAgra that investors should be most excited about is its 3.5% dividend yield. Food-processing companies generally offer lower dividends, with the industry average being 2.2%. ConAgra has increased its dividend payment in each of the last five years at an annualized rate of 6%. Meanwhile, other major private foods company TreeHouse Foods (NYSE: THS  )  doesn't pay a dividend.

ConAgra trades at a hefty discount to its peers, at only 12.5 times next year's estimated EPS of $2.23. The industry average earnings multiple is 18 times, and ConAgra's five-year average is 16.5 times. Over the long term, ConAgra believes it can grow earnings at an annualized 10%. Using that estimate puts its price-to-earnings-to-growth ratio at slightly more than 1.

Meanwhile, TreeHouse's forward P/E based upon next year's estimated earnings is 18 times earnings. This private foods company is suing Keurig Green Mountain over anti-competitive practices in the K-Cup market. For investors looking to invest in TreeHouse, the key will be the private-label coffee business. Its single-serve coffee business generated sales of $180 million last year, with expectations to grow to $250 million next year. However, with its valuation, ConAgra looks to be the better bet on the private foods market as a whole.

Upside to the shares
ConAgra trades a forward P/E of 12.5 based on next year's earnings estimates. This is below its five-year average P/E of 16.5. The company's market share and partnerships with major retailers provide it a solid economic moat.

ConAgra continues to perform nicely for shareholders, with revenue up near decade highs over the trailing-12 month period. Its free cash flow margin is above 7%, and the company's dividend payout as a percentage of free cash flow is only 50%.

Bottom line
ConAgra is one of the best plays on the private food market. There aren't many stocks that give you that kind to access to the industry. It's also one of the best income plays in the industry. The recent selling pressure has presented investors with an enticing buying opportunity.

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 26, 2014, at 3:07 PM, pondee619 wrote:

    "ConAgra trades at a hefty discount to its peers, at only 11 times next year's earnings"

    "ConAgra trades a forward P/E of 13 based on next year's earnings estimates"

    Huh? 11 or 13 times nest years earnings?

Add your comment.

DocumentId: 2884139, ~/Articles/ArticleHandler.aspx, 7/29/2014 5:05:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement