The packaged food industry has been facing serious headwinds lately. Let's take a look at some of those factors that most dramatically contributed to industry woes.
- Commodity prices have risen throughout 2011.
- High unemployment rates persist domestically.
- Overall consumer spending remains weak.
Yet, hard times can shake out the real winners in an industry, and a few companies have shone through in the face of these conditions. Here is a quick industry take, three big-name stocks, and my opinion on which is best positioned for success.
View from 10,000 feet
Companies have gotten creative in their management of higher commodity costs. Since customers are generally more sensitive to changes in price than changes in quantity, many companies opted to produce smaller portions while keeping price unchanged. This, in effect, allowed companies to pass on higher commodity prices without having to visibly charge more. However, the inverse is rarely true of good economic times, when consumers rarely see lower prices on the shelves. Instead, the gains are translated into improved margins for companies. This could spell big gains down the road if commodities ease.
With that, let's take a look at three companies to decide if they're well positioned going forward.
However, B&G seems to have ridden this enthusiasm a bit high for me. Shares are up 25% in the last month, and their P/E ratio is the loftiest of the group. Personally, I like to see more international exposure, and B&G primarily serves the U.S. and Canada. Lastly, the effects from their most recent price increases have yet to truly be seen as they just went into effect on Sept. 1. Overall, I feel this is a strong company, but after the stock run-up and price increases, I'm in "hurry up and wait" mode.
If commodity prices ease going forward, companies that have been able to successfully pass previous price hikes onto consumers, like General Mills, will likely benefit. I like their brand strength and international exposure. I also like B&G Foods, but would wait for a pullback before I consider owning any myself. Of the companies mentioned here, General Mills is my pick.
Agree? Disagree? Please feel free to let me know in the comments section below. And be sure to add these three companies to your watch list to see how they manage commodities prices going forward.