Are These Snack Companies Wise Investments?

Snack and beverage companies have customarily relied on brand names to ensure their earnings growth. But as consumers become more health-conscious, these businesses need to offer healthier alternatives.

Jul 11, 2014 at 10:17AM

Snack companies design good brands to create consumer demand for their products, which grows their revenue and earnings and results in shareholder returns. But consumers are becoming more health-conscious. So snack and beverage companies need to offer healthier items to ensure their future growth. This includes companies like PepsiCo (NYSE:PEP), J&J Snack Foods (NASDAQ:JJSF), and Snyder's-Lance (NASDAQ:LNCE).

PepsiCo's growing organic revenue
PepsiCo owns a well-known portfolio of brands including Pepsi, Frito Lay, Quaker, and Gatorade. Its beverage business has struggled, however, in comparison with that of Coca-Cola (NYSE:KO). Furthermore, as has previously been reported, Coke is responding to growing consumer health concerns.

The company announced that it will cut a controversial ingredient, brominated vegetable oil, or BVO, from all of its drinks. Coca-Cola believes BVO is safe, but consumer groups have been pressuring the beverage company to eliminate its use. In short, this will allow the company to avert a potential controversy and support its iconic brand name.

While soft drink sales are being challenged over unwanted ingredients like BVO and artificial sweeteners like corn syrup, PepsiCo gets its strength from its well-known snacks that include Lay's, Doritos, and Cheetos. But consumers also have health concerns about salty snacks. And there is the unknown risk of action by health advocates and lawmakers looming large on the horizon.

PepsiCo, however, is taking proactive steps to mitigate these risk factors in its Americas foods division, where organic revenue is growing. In fact, the company reported that the division's organic revenue grew 5% in the first quarter. Going forward, PepsiCo anticipates organic revenue growth in the mid-single digits for 2014.

J&J Snack Foods' nutritional snacks and beverages
J&J Snack Foods manufactures and distributes "nutritional" snack foods and frozen beverages to the food service and retail supermarket industries. The company's products include soft pretzels marketed under the brand name SuperPretzel, as well as frozen juice treats and desserts such as Luigi's, Icee, and Minute Maid.

While determining the difference between unhealthy and nutritional items is ultimately in the eye of the consumer, J&J last month announced the launch of Minute Maid 100% Frozen Juice Bars.

The company said the frozen treats are naturally flavored and the Juice Bars are the "only frozen juice novelty made with 100% juice in mainstream retail." Finally, the gluten- and nut-free frozen juice bars are only sweetened with fruit juice and processed in a peanut-free facility. "The Minute Maid 100% Juice Bars are unique to the frozen aisle," said Alissa Davis, Director of Marketing for J&J Snack Foods.

Furthermore, Minute Maid is a registered trademark of Coca-Cola. As Davis notes in the press release, J&J and Minute Maid have built a 15-year partnership. So not only is this a win for J&J, but Coke will also be the beneficiary of a larger market share in the frozen aisle carved out by the Minute Maid frozen fruit bars. In addition to offering consumers healthier items like these, J&J is strong in a number of ways. 

The company has a solid track record of revenue and net income growth while maintaining low debt levels. J&J Snack Foods also pays a modest dividend. Earlier this spring the snack food maker declared a regular quarterly cash dividend of $0.32 per share on its common stock payable on July 2, 2014, to shareholders of record as of the close of business on June 13, 2014.

Snyder's-Lance sells Private Brands to get Baptista's baking
Snyder's-Lance just announced the completion of the sale of its Private Brands business for $430 million. This came on the heels of the company's acquisition of Baptista's Bakery. The company expects its annual net revenue to decrease by about $250 million after the sale.

Some observers may question the wisdom of this bake-off, so to speak. But the play here appears to be an effort to steer the company away from crackers and chips toward the healthier products already offered by Baptista's. "This is an important step forward for Snyder's-Lance as we dedicate our attention to our branded portfolio," said Carl E. Lee, Jr., president and chief executive officer.

In sum, the company believes its future growth lies in its branded products and "better-for-you" snacks. It also has the goals of increasing margins and offsetting costs by selling Private Brands. The company also intends to focus on expanding the distribution of its core brands.

Final Foolish takeaway
PepsiCo's strong portfolio of brands and growing organic revenue stream have positioned the company to meet the current appeal of its snacks and shift toward healthier snack items. Furthermore, J&J Snack Foods will continue to capitalize on brand recognition for well-known names such as Icee and Luigi while launching healthier frozen Minute Maid treats.

Finally, the new focus of Snyder's-Lance on "better-for-you" snacks via the Baptista acquisition will help the company offer healthier options to consumers. Ultimately, each of these companies is poised to meet growing consumer health concerns. But investors should always choose wisely by focusing on healthy revenue and earnings growth over the long run.

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Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

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