Food stocks: A simple yet smart investment

Global food giant Nestle looks good.

By InvestorPlace Mar 23, 2012 9:32AM

By James Brumley

 

It's kind of funny how complicated and difficult we can make the art of stock picking. There's really only one winning formula that has withstood the test of time: Buy stocks of companies that give consumers what they're always going to buy, and make sure that company knows how to increase market share. Given enough time, everything else seems to take care of itself.

 

Case in point: food. We all might gripe and complain about rising prices at the grocery store, yet nobody ever stops eating.

 

No, it's not sexy. But money is sexy, and a handful of food companies have quietly been collecting more and more of it -- partially because they're tapping into new territories, and partially just because the planet is forever increasing the number of mouths to feed.

 

It might not be a "perfect storm" for revenue growth, but a "perfect drizzle" can bear fruit too.

 

What you missed out on

Odds are good you don't own any shares of Nestle (NSRGY). Yes, the company that's famous for its chocolate milk mix, at least in the United States. There's much more to the company than just that though, particularly overseas. It manages brand names Nescafe, Perrier, Jenny Craig, Haagen-Dazs and Carnation, just to name a few.

 

It's a pink sheet ADR, which right off the bat steers a lot of investors clear. Before you shrug it off, though, you should know it's not your typical OTC equity. It's a pink-sheeter because the Swiss company has decided it's just not worth jumping through all the hoops necessary to maintain an exchange listing in the United States. But Nestle still trades like a blue chip, as the company still is one of the world's most legitimate, earning $10.3 billion last year. More important, shares of NSRGY have doubled in value over the past three years thanks to some impressive results.

 

Thing is, the same growth that prodded the rally still is intact -- the population is growing. In fact, Nestle's CEO Paul Bulcke recently offered a chilling forecast from the United Nations -- our current agricultural output must increase by 70% if we expect to feed the projected 2050 population of 9.3 billion people.

 

A huge piece of that growth is going to sprout from currently underserved emerging markets. Nestle's CFO, James Singh, noted following last quarter's earnings announcement that the company expected emerging markets to account for half of all its sales. That figure is 40% now, after Nestle's emerging-market revenue grew by double-digits last year.

 

There's little doubt that Nestle is properly positioning itself to capture an even bigger piece of the emerging-market pie.

 

For starters, it's a bidder in the race to acquire Pfizer's (PFE) baby food division -- something of a misfit for the drug company, but a business that would be in good hands with Nestle. Nestle also is axing its U.S. venture with Coca-Cola (KO) so it can devote more attention to expanding its own brands in Europe, Canada, Taiwan and Hong Kong. You get the idea -- the company's going to where the growth is.

 

Proof of the pudding

Don't dismiss the importance of emerging markets to food producers, either, as it's not just Nestle that sees the writing on the wall. Kraft (KFT) sees it, too, following some surprising strength in India. Kraft's sales (via Cadbury, acquired in 2010) in India were up 40% last year, after growing 30% the year before. More than half the company's sales now are driven by foreign markets, and 25% of them are driven by emerging markets like Brazil, China, India and Mexico. Kraft thinks that number's going to be closer to 33% of all sales by 2013.

 

And it's not like Kraft and Nestle are isolated cases. Heinz (HNZ) saw a huge increase in year-over-year revenue last quarter with its "Rest of the World" division, which focuses on -- you guessed it -- markets other than North America. Heinz thinks emerging markets will make up 20% of its total revenue this year versus only 14.4% last year. Kellogg (K) is making deliberate plans to crank up sales of Pringles chips to emerging markets this year, after snatching the Procter & Gamble (PG) brand name out from under reeling Diamond Foods (DMND) a few weeks ago.

 

Bottom line

You get the idea. All these companies can't be collectively wrong about where the next major growth is going to come from. Of all the names mentioned here, though, Nestle seems to be best-positioned to tap into the organic growth of emerging markets, with Kraft being a close second.

 

Sometimes, it's the simple things that make for the best investments.

 

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

 

Related articles

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

109
109 rated 1
276
276 rated 2
421
421 rated 3
629
629 rated 4
511
511 rated 5
538
538 rated 6
686
686 rated 7
507
507 rated 8
331
331 rated 9
109
109 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
KOGKODIAK OIL & GAS Corp10
UPLULTRA PETROLEUM Corp10
TAT&T Inc9
COPCONOCOPHILLIPS9
DVNDEVON ENERGY CORPORATION9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.