Market Watch : Investors Develop Strong Taste for Food Stocks : Securities: With the economy looking shaky, many are playing it safe by turning to the non-cyclical food sector, where prices are roaring upward.
Food, glorious food! Chips and dip, chocolates and brownie mix, cheeses and hot dogs and TV dinners. Although the dieter in you may fight to resist them, the investor should show less restraint.
Food stocks are the first line of portfolio defense, analysts say, and lately investors have been taking heed. Current economic uncertainty is the reason.
“We’re seeing that they (food stocks) underperformed the market fairly substantially in the first quarter but came roaring back in the second,” said L. Craig Carver, food industry analyst for Dain Bosworth in Minneapolis. “People are tending to take a bit more of a conservative approach toward the market. When that happens, they look at the more defensive types of groups.”
Or as John C. Maxwell Jr. succinctly puts it: “Food is not cyclical. No matter what happens, you’ve got to eat.” He is a food, tobacco and beverage analyst for Wheat First Securities Inc. in Richmond, Va.
Food stocks in the Standard & Poor’s 500 index rose a sluggish 3% in the first quarter of 1990. In the past three months, however, food stock prices have risen 12.3% in response to the worrisome economy, analysts said.
Real growth for the final quarter of 1989 and the first quarter of 1990 was less than 2%. Economists predict that second-quarter real growth will remain sluggish, and the outlook is bleak for the remainder of the year.
But a bad economic outlook is only one reason for the increased interest in food-processing companies. Two major acquisitions have also piqued investor interest. In an era when mergers and acquisitions appear moribund, food processing is one of the few areas where there are signs of life.
On June 7, Omaha-based ConAgra announced that it would buy Beatrice Co. from leveraged-buyout specialist Kohlberg Kravis Roberts & Co. for $1.34 billion in cash and stock. That makes ConAgra the second-largest U.S. food processing company, behind Philip Morris Cos.
And on June 22, Philip Morris, the largest consumer goods company in the world, said it would buy most of Jacobs Suchard AG of Zurich, Switzerland, the world’s No. 3 coffee and chocolate company. The deal is valued at $3.8 billion.
Quaker Oats could be another takeover target, Maxwell said.
“Not only had they announced the spinoff of the (Fisher-Price) toy operation, but also (recently), they announced substantial cutbacks,” he said. “Any time a company has problems and is showing signs of weakness, probabilities increase that it may become a target.”
And that makes a stock a particularly good investment.
Sara Lee is another stock worth considering, Maxwell contends. It has weaknesses in its food and non-food lines, but they are problems that “are fixable and will be fixed,” he said. The difficulties, which have held the stock back, make it particularly attractive.
And on Friday, Campbell Soup Co. announced a restructuring that will eliminate 3,000 jobs worldwide and rid the company of its U.S. and Canadian fresh-foods and fresh-produce business. The company will close plants in Sumter, S.C., and Fremont, Neb. Earlier this year, it eliminated 8,000 jobs.
“Campbell Soup is a perennial takeover target,” Maxwell said. “So the stock is inordinately high. If someone doesn’t take it over soon, you have 15 points of downside risk. You can sit around here, and nothing ever happens.”
If you want to buy a good company, Maxwell said, take a look at General Mills, which is “just sitting out there cranking out earnings.”
The Minneapolis-based consumer goods company last week reported fourth-quarter earnings of $75.3 million, up from $35.6 million in the same quarter last year.
One problem with food-processing company stocks, though, is the price; safety is expensive. General Mills, for example, rose $3.875 per share to $90.25 on Thursday when it reported favorable earnings. The stock slipped 37.5 cents Friday to close at $89.875 on the New York Stock Exchange, but it’s still trading for 21 times its per-share earnings, which is not cheap.
“There’s some companies in the industry that aren’t doing very well, but those are the exceptions, not the rule,” said Ronald L. Strauss, food analyst for William Blair in Chicago. “Most of the ones that are not showing unfavorable earnings comparisons have already jumped up: General Mills, ConAgra, Gerber.”
Not everyone, however, is high on food. A. Marshall Acuff Jr., portfolio strategist at Smith Barney, Harris Upham & Co. in New York, acknowledges that food stocks have been among the best performers for several years.
But, “on balance, we are more of a seller of foods than a buyer,” Acuff said. “We recommend purchase of only a few names: Sysco, ConAgra and Philip Morris. We suggest people get out of . . . Kellogg and Quaker Oats. . . . There’s relative deterioration in earnings.”
Times staff writer Kathy M. Kristof contributed to this story.
