The government and the people wanted alternatives to gasoline or at the very least to reduce our dependency...boom put an ethanol/gas mixture out there...
This is not a politically charged article, but more a look on the financial impacts, that is why you will see how this push affects certain companies described below.
The Corn Rush Could Make These Wide-Moat Firms Cheap
By Mitchell P. Corwin, CFA, CPA | 07-18-07 |
U.S. consumers are already feeling the pinch from $3-plus gasoline, higher energy prices, and rising interest rates. Now they have a new headache: the increasing cost of putting food on the table. The federal government's mandate to increase ethanol production as well as the world's growing demand for commodities, such as aluminum, is significantly driving up input costs for food and beverage firms. Overall food inflation could be double the general inflation rate in 2007.
No increase has gotten more attention this year than the price of corn, which has doubled, thanks to ethanol production diverting corn out of the food chain. The U.S. Department of Agriculture expects ethanol production to exceed 10 billion gallons by 2009 compared with 5 billion gallons in 2006. Corn ends up in some way or another in many of the packaged food products we consume everyday, and it's a primary ingredient in animal feed. Not only will you be paying more for that 12-pack of Coke (think corn syrup), but also for milk, cheese, and meat. Even worse, to meet higher demand for corn, farmers are planting less of other essential crops like wheat and soybeans. Wheat prices recently hit a 52-week high.
Many consumer products companies have been able to fend off rising input costs in recent years with efficiency gains in other areas of their businesses. However, the cost pressures are now impossible to overcome without significantly raising prices. We are seeing many of our consumer products companies push through much higher price increases this year--on the order of mid- to high-single-digit price increases--though some of the increases may not be readily apparent to consumers. For example, General Mills (GIS) is shrinking the size of its cereal boxes, effectively giving consumers less for the same price.
What's the Impact?
With price increases, food and beverage companies always face the same risk: a decline in volume. Consumers may either seek alternatives, such as private-label brands, or simply choose to buy fewer of the food and beverage firms' products. In addition, for many companies, the price increases still don't cover the full extent of the cost pressures they face. If volumes don't keep up, earnings growth could trail sales gains from higher prices. Witness the year-over-year first-quarter results for Coca Cola Enterprises (CCE), a Coca-Cola bottler. In North America, the company's cost of sales increased 7.5% per case, pricing per case was up 4%, and volume declined 4%. Overall earnings on an operating basis were flat while revenue was up 5%.
Food and Beverage Stocks to Keep on Your Radar
Even the best food and beverage companies are getting squeezed by higher input costs. But because the best of the bunch sell branded products that consumers will continue to pay up for, they should be able to offset those pressures over the longer term. In addition, much of the recent cost pressures, especially for corn, are much more problematic in the United States than in other parts of the world, so companies positioned well internationally are better off from a cost perspective.
While we don't see many screaming buys today, analyst Matthew Reilly recently raised his fair value estimate for brewer Molson Coors (TAP). In addition to seeing some benefits down the road from cost-cutting initiatives, Reilly thinks highly of the company's dominant position in the Canadian beer market and strong brands in the U.S.
As for other food and beverage stocks, we could certainly see the market overreact from some near-term margin pressures, and this could create opportunities for investors to snap up some high-quality food and beverage stocks that we think have durable long-term competitive advantages and solid international prospects. Here are some companies we think long-term investors should keep on their watch lists:
Campbell Soup (CPB)
Campbell is only one of a handful of packaged-food firms that has a wide moat around its business. The firm has achieved this through the complete dominance it holds over the soup category in North America. Despite its leading position, Campbell realizes it needs to continuously invest its profits back into product innovation and marketing in order to stay one step ahead of the competition. The company has also benefited from the focus it has placed on many of its non-soup brands and product lines, allowing it to offset some of the occasional shortfalls that crop up in the firm's all-important soup business.
Coke (KO)
After decades of international expansion, Coke products account for about 10% of total worldwide nonalcoholic beverage volume--a large portion that leaves plenty of opportunity. Coke aims to capitalize by increasing per capita consumption of its products around the globe, especially in emerging markets. We believe the company can still expand carbonated soft drink volume in several markets, but it must also leverage its infrastructure to sell more noncarbonated beverages, even if this transformation is belated.
Diageo PLC (DEO)
Diageo is the largest spirits maker in the world, boasting nine of the world's top 20 brands. Spirits make up about 75% of the company's revenue, with beer constituting 20% and wine the remainder. The company puts it marketing muscle to work on a global scale behind such leading brands as Smirnoff, Johnnie Walker, Jose Cuervo, Guinness, and Captain Morgan. We believe the strength of the company's brands, its worldwide scale, and its shrewd, shareholder-focused management will deliver steady financial results, making the company an attractive long-term holding.
H.J. Heinz (HNZ)
Although it's the only narrow-moat firm on our list, H.J. Heinz is the undisputed leader in ketchup sales worldwide. The company has dominant market share in just about every country where it competes. The strength of the Heinz brand has also allowed the firm to expand its iconic trademark into many other food categories. From ketchup to baked beans to baby food, the Heinz brand generates more than $3 billion in global sales each year.
McCormick (MKC)
McCormick controls half of the market for spices and seasonings in North America and is more than twice the size of its next-largest branded competitor. With leading brands like McCormick and Old Bay, the company has sustained solid sales growth and profitability in its category. Over time the company has introduced new products on top of its trademark brands while maintaining its value-added focus on flavor. At the end of 2006, about 10% of sales were from products introduced since 2004, and 70% of sales came from value-added products such as grinders and unique ethnic seasonings.
PepsiCo (PEP)
PepsiCo sets the standard for consumer products companies, deriving sales and profit growth from its dominant position in salty snacks and its formidable presence in beverages. The company's international prospects remain bright, and we think its moat is among the largest of any consumer product manufacturer.
Wrigley (WWY)
Wm. Wrigley Jr.'s significant miscalculation regarding the strength of acquired confectionery brands from Kraft Foods (KFT) has caused consternation among investors, but we believe the firm is taking positive steps to revive the purchased brands and cement its U.S. leadership position in chewing gum. A slowly improving domestic business and continued international prosperity paint a bright long-term picture.
This is not a politically charged article, but more a look on the financial impacts, that is why you will see how this push affects certain companies described below.
The Corn Rush Could Make These Wide-Moat Firms Cheap
By Mitchell P. Corwin, CFA, CPA | 07-18-07 |
U.S. consumers are already feeling the pinch from $3-plus gasoline, higher energy prices, and rising interest rates. Now they have a new headache: the increasing cost of putting food on the table. The federal government's mandate to increase ethanol production as well as the world's growing demand for commodities, such as aluminum, is significantly driving up input costs for food and beverage firms. Overall food inflation could be double the general inflation rate in 2007.
No increase has gotten more attention this year than the price of corn, which has doubled, thanks to ethanol production diverting corn out of the food chain. The U.S. Department of Agriculture expects ethanol production to exceed 10 billion gallons by 2009 compared with 5 billion gallons in 2006. Corn ends up in some way or another in many of the packaged food products we consume everyday, and it's a primary ingredient in animal feed. Not only will you be paying more for that 12-pack of Coke (think corn syrup), but also for milk, cheese, and meat. Even worse, to meet higher demand for corn, farmers are planting less of other essential crops like wheat and soybeans. Wheat prices recently hit a 52-week high.
Many consumer products companies have been able to fend off rising input costs in recent years with efficiency gains in other areas of their businesses. However, the cost pressures are now impossible to overcome without significantly raising prices. We are seeing many of our consumer products companies push through much higher price increases this year--on the order of mid- to high-single-digit price increases--though some of the increases may not be readily apparent to consumers. For example, General Mills (GIS) is shrinking the size of its cereal boxes, effectively giving consumers less for the same price.
What's the Impact?
With price increases, food and beverage companies always face the same risk: a decline in volume. Consumers may either seek alternatives, such as private-label brands, or simply choose to buy fewer of the food and beverage firms' products. In addition, for many companies, the price increases still don't cover the full extent of the cost pressures they face. If volumes don't keep up, earnings growth could trail sales gains from higher prices. Witness the year-over-year first-quarter results for Coca Cola Enterprises (CCE), a Coca-Cola bottler. In North America, the company's cost of sales increased 7.5% per case, pricing per case was up 4%, and volume declined 4%. Overall earnings on an operating basis were flat while revenue was up 5%.
Food and Beverage Stocks to Keep on Your Radar
Even the best food and beverage companies are getting squeezed by higher input costs. But because the best of the bunch sell branded products that consumers will continue to pay up for, they should be able to offset those pressures over the longer term. In addition, much of the recent cost pressures, especially for corn, are much more problematic in the United States than in other parts of the world, so companies positioned well internationally are better off from a cost perspective.
While we don't see many screaming buys today, analyst Matthew Reilly recently raised his fair value estimate for brewer Molson Coors (TAP). In addition to seeing some benefits down the road from cost-cutting initiatives, Reilly thinks highly of the company's dominant position in the Canadian beer market and strong brands in the U.S.
As for other food and beverage stocks, we could certainly see the market overreact from some near-term margin pressures, and this could create opportunities for investors to snap up some high-quality food and beverage stocks that we think have durable long-term competitive advantages and solid international prospects. Here are some companies we think long-term investors should keep on their watch lists:
Campbell Soup (CPB)
Campbell is only one of a handful of packaged-food firms that has a wide moat around its business. The firm has achieved this through the complete dominance it holds over the soup category in North America. Despite its leading position, Campbell realizes it needs to continuously invest its profits back into product innovation and marketing in order to stay one step ahead of the competition. The company has also benefited from the focus it has placed on many of its non-soup brands and product lines, allowing it to offset some of the occasional shortfalls that crop up in the firm's all-important soup business.
Coke (KO)
After decades of international expansion, Coke products account for about 10% of total worldwide nonalcoholic beverage volume--a large portion that leaves plenty of opportunity. Coke aims to capitalize by increasing per capita consumption of its products around the globe, especially in emerging markets. We believe the company can still expand carbonated soft drink volume in several markets, but it must also leverage its infrastructure to sell more noncarbonated beverages, even if this transformation is belated.
Diageo PLC (DEO)
Diageo is the largest spirits maker in the world, boasting nine of the world's top 20 brands. Spirits make up about 75% of the company's revenue, with beer constituting 20% and wine the remainder. The company puts it marketing muscle to work on a global scale behind such leading brands as Smirnoff, Johnnie Walker, Jose Cuervo, Guinness, and Captain Morgan. We believe the strength of the company's brands, its worldwide scale, and its shrewd, shareholder-focused management will deliver steady financial results, making the company an attractive long-term holding.
H.J. Heinz (HNZ)
Although it's the only narrow-moat firm on our list, H.J. Heinz is the undisputed leader in ketchup sales worldwide. The company has dominant market share in just about every country where it competes. The strength of the Heinz brand has also allowed the firm to expand its iconic trademark into many other food categories. From ketchup to baked beans to baby food, the Heinz brand generates more than $3 billion in global sales each year.
McCormick (MKC)
McCormick controls half of the market for spices and seasonings in North America and is more than twice the size of its next-largest branded competitor. With leading brands like McCormick and Old Bay, the company has sustained solid sales growth and profitability in its category. Over time the company has introduced new products on top of its trademark brands while maintaining its value-added focus on flavor. At the end of 2006, about 10% of sales were from products introduced since 2004, and 70% of sales came from value-added products such as grinders and unique ethnic seasonings.
PepsiCo (PEP)
PepsiCo sets the standard for consumer products companies, deriving sales and profit growth from its dominant position in salty snacks and its formidable presence in beverages. The company's international prospects remain bright, and we think its moat is among the largest of any consumer product manufacturer.
Wrigley (WWY)
Wm. Wrigley Jr.'s significant miscalculation regarding the strength of acquired confectionery brands from Kraft Foods (KFT) has caused consternation among investors, but we believe the firm is taking positive steps to revive the purchased brands and cement its U.S. leadership position in chewing gum. A slowly improving domestic business and continued international prosperity paint a bright long-term picture.
