In an unpredictable world, food stocks have special appeal. Established food companies have become established because they meet some need in the population. Many pay generous dividends, have modest valuations, and are quintessential defensive stocks. Of note is that politicians in Washington appear to have finally ended ethanol subsidies. This will positively lend additional uncertainty to the corn market, and likely will negatively impact sellers of corn. I am going to analyze food specialty and food commodity stocks, and see some winners and losers for 2012, and beyond.
Dean Foods, Inc. (NYSE:DF)
The old Dean Foods was acquired by Suiza Foods, in late 2001, which later changed its name back to the new Dean Foods. It is the nation's largest manufacturer and producer of milk and dairy products. Its position has been enhanced and focused by a series of acquisitions and divestitures over the years, chief among them the purchase of organic maker Horizon Dairy in 2004, and the sale of its specialty foods into the new Treehouse Foods, Inc. (THS) in 2005.
Dean Foods was trading recently at about $11 per share. Its 52 week range is from $13.90 to $7.83. It has a market capitalization of just over $2 billion, and a P/E of 14, on an adjusted basis. Dean Foods pays no dividends. The earnings report for Dean Foods for the third quarter of 2011 skewed things for the year, due to a $1.9 billion goodwill write off. Taking away that charge, it was a solid third quarter for the company with earnings of $0.18 per share, which compares favorably with $0.13 earnings in the third quarter 2010.
One troubling aspect of Dean Foods is its long term debt of some $3.7 billion. It comprises 71% of capitalization, and the interest is covered by earnings only 2x... While the debt has fallen from some $5.2 billion in 2007, the current load is still too high for comfort.
Dean Food's premium brands, such as Dean Soy Milk, and the Horizon Organic line, all but guarantee future growth from here. I cannot see demand for healthier product slackening, even accounting for the premium price and margins. For that reason, assuming further efforts to clean up the encumbered balance sheet, I see Dean Foods having a fine 2012 and beyond, perhaps doubling in price of more out to mid decade.
Corn Products International (CPO)
CPO is a world leader in corn refining into things such as corn syrup, industrial enzymes, and similar products. Foreign sales account for over 70% of revenues, and its products are spread into over sixty different product categories.
CPO was trading recently at about $52 per share. Its 52 week range is from $59.50 to $36.65. It has a market capitalization of nearly $4 billion, and a P/E of 10.8. It raised its quarterly dividend by 25%, to $0.20 per share, earlier in December, so its effective yield now is 1.5%.
CPO has been doing well. In 2010, CPO purchased National Starch. That purchase led to very positive numbers. Revenues in the 3rd quarter of 2011 were up 60% year over year to over $1.6 billion. Earnings per share grew by 48% to $1.20 per share.
CPO's balance sheet remains fairly healthy with long term debt comprising 42% of capital. Increased earnings and cash flows will continue into 2012. Longer term, however, there is only so much “juice” that can be squeezed from the National Starch purchase. By 2013, the easy synergies will have taken place, and a more normalized growth pattern will likely emerge. But for the next year, enjoy the ride.
Smithfield Foods, Inc (NYSE:SFD)
SFD is the world's leading pig and pork producer. It previously was a more integrated meat company, but in 2008 it sold its beef operations to JBS, S.A... SFD's stock was trading recently at a little over $24 per share. That is near the high end of its 52 week range of from $25.12 to $17.79. It has a market capitalization of $3.9 billion, a P/E just under 8 and does not pay a quarterly dividend.
SFD has strung together several excellent quarters in a row. The most recent quarter made for five consecutive quarters the company has beaten the mean analyst profit expectation. Yet, the profit trend is down, as analysts are expecting full year 2011 and 2012 to be at a level some 20% below the actual 2010 profit level of $3.03 per share.
SFD's balance sheet is in O.K shape. Long term debt is only 36% of capital, and the nearly $3.5 billion in debt it carried in 2007 has been whittled down to $2 billion today. But cash and cash equivalents are low at just $136 million.
Analysts like SFD with a mean rating of 2.1, but I don't agree. There is nothing outstanding about its business, and there are better choices in this group.
Tootsie Roll Industries, Inc. (TR)
TR makes a variety of candies and confections, but the ubiquitous tootsie roll is the heart and soul of its product lineup. I have owned a small position in the company for some twenty years, and it has never disappointed me. It is, in my view, the quintessential defensive stock.
TR was trading recently at about $23.50, near the low end of its 52 week range of from $29.92 to $22.82. It has a market capitalization of about $1.4 billion. It has a P/E of 32, and pays a quarterly dividend of $0.08, for an annual yield of 1.3% The company has raised its dividend annually for 44 years. Addition, in each of the past two years, a 3% stock dividend was issued in the first quarter.
Demand for tootsie pops and junior mints is not likely to collapse, maybe ever. But TR is vulnerable to commodity costs for sugar, cocoa, and the like. Wild swings in these markets, cocoa in particular, negatively impacted 2011 earnings, but are likely to decline in 2012.
According to management, commodity costs grew an average of 4% year to year, but the company's price raising efforts will not bear fruit until the current 4th quarter. Due to this misalignment, per share net income in the third quarter fell from $0.45 in 2010 to $0.32 in 2011.
I was given my shares as a gift, and I believe this issue is best suited only to the most conservative investors. The company has virtually no debt, a highly predictable model, and a virtually guarantee of gently rising dividends. What it does not have is any likelihood of substantial capital improvement that I can see.
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