Food stocks at record high, and may rise further
But investors are still hungry for the above-average dividend yields they offer.
Investors have been feasting on food stocks, but there is still room at the table to chow down.
On Tuesday, shares of Hershey (HSY), J.M. Smucker (SJM), Tyson Foods (TSN), and Hormel (HRL) hit fresh all-time highs, joining General Mills (GIS), Kellogg (K), Kraft Foods Group (KRFT), McCormick & Co. (MKC), and Mondelez International (MDLZ), each of which have seen shares hit all-time highs at some point in 2013.
What's whetting the appetite for stocks in the sector is that the group offers consumers a relatively low-risk, higher-dividend-yielding investment. The group is up about 30% in 2013, outpacing the results of the broader S&P 500 index.
Going forward, however, investors will need to shop the sector with care.
S&P equity analyst Tom Graves noted the majority of the food stock gains this year came in the first three months of the year, when investors were particularly hungry for above-average dividend yield.
"U.S. volumes are still relatively soft for some of these food manufacturers, and later this year overseas results are likely to be hurt from the stronger U.S. dollar," Graves said. While he cautions that a number of food company stocks are trading at high valuations, he still sees opportunity.
"We still see some attractive characteristics to food stocks, including the stability of revenue growth, as well as the dividend yield and some potential for long-term above average growth from emerging overseas markets," he said.
S&P's favorite packaged food and meat company stocks include J.M. Smucker, General Mills, ConAgra (CAG), and Kellogg.
Recipe for growth
Many of these packaged food and meat companies have been around for more than a century, and overall grocery sales typically only grow when populations do. So while food sales in aggregate can be a zero-sum game, there are winners and losers within the sector. Most agree the winning recipe is a combination of strong brand recognition and consumer loyalty, innovative product launches, international growth, and effective marketing to inform shoppers of new products and remind them of old favorites.
Orville, Ohio-based J.M. Smucker has outlined a three-year plan that includes beefing up its supply chain, as well as investing in its coffee-and-fruit spread businesses in effort to improve overall sales.
Hershey was recently added to Citi's top picks list and Moody's recently upgraded its credit rating one notch. The chocolate maker's revenue growth prospects are broad-based. Classics such as Heath and Mr. Goodbar are posting double-digit sales growth along with its new Brookside product line, which Citi thinks could be its next $500 million brand. International markets, including China, Mexico, and Brazil, have seen strong revenue growth.
General Mills plans to launch around 200 new food products this year. The packaged food company expects net sales to grow at a low single-digit rate in 2014 to exceed $18 billion.
But not all food makers are tasting so good.
Kellogg cut its revenue forecast for the year, citing slower growth in developed markets, including the U.S. Kellogg Vice President Paul Norman blamed sagging cereal sales on too-busy consumers, saying on the company's recent earnings call, "We understand sometimes consumers don't have time for a bowl of cereal."
General Mills faces a similar cereal dilemma and is using nostalgia to help market some of its classic kids cereals, like its Lucky Charms brand, to adults.
Both General Mills and Kellogg are looking to grow sales by offering healthier products and acquiring brands. Kellogg recently bought Pringles from Procter & Gamble (PG), expanding its reach both in product and geography. Nearly two thirds of Pringles sales come from overseas.
On Monday Jefferies downgraded shares of Kraft Foods Group to "hold" from "buy." In a note to investors, Jefferies analyst Thilo Wrede said that while the food manufacturer is a good operator with a strong strategy, its stock price currently reflects that strength. Additionally, Wrede warned that competition appears to be increasing, pressuring Kraft's fundamental performance.
What's to come?
Higher prices for ingredients in recent years have inflated the prices of packaged food for consumers, likely causing a pull back on pantry stock-ups. S&P's Graves expects that a robust crop harvest in both North and South America will increase the supply of key ingredients like corn and soybeans, which will lower the costs for food manufacturers, and turn into good news ahead in the grocery aisle for both consumers and investors.
"Higher prices have limited volumes over the last couple of years, but with less price increases ahead, we think that in turn with lead to better volumes," Graves said.
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