Kraft Heinz and Other Big Food Stocks Have Been Hammered, but that Doesn’t Make Them Bargains-BARONS…

Kraft Heinz and Other Big Food Stocks Have Been Hammered, but that Doesn’t Make Them Bargains
By Jack Hough
March 1, 2019 10:10 p.m. ET

Or could it be that Americans are finally realizing that GMO,
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Industry star Kraft Heinz recently served up weak results with an unsavory stew of announcements, including a dividend cut and a write-down of the Kraft and Oscar Mayer trademarks…
Sending its stock (ticker: KHC) down 27% in a day.
This past week, Campbell Soup (CPB) and J.M. Smucker (SJM) reported quarterly financial results that pleased investors and their shares leapt 10% and 5%, respectively.
Those recent results offer comfort that not all of Big Food is getting Heinz-ed, but investors shouldn’t step up to buy before separating fact from folly in the food aisle.

On the plus side, stock prices have gotten much more appealing. A basket of nine major U.S. food makers tracked by FactSet has fallen 30% in price over the last two years.
A few years ago, before the Federal Reserve turned earnest on interest rate increases, this group traded above 20 times projected earnings, a premium at the time of more than 30% to the broad U.S. stock market.
Now, the nine fetch 14.8 times earnings, a 10% discount. The Fed, meanwhile, has paused on rate increases, which could bring dividend hunters out from hiding. FactSet’s food basket pays a hearty 4%.
But food stocks can no longer be called defensive, as long as wild price swings abound. Kraft’s woes have been blamed on cost-cutting at the expense of investment in innovation, but that is a symptom. The underlying cause is that once-steady growth has been disrupted by profound, durable changes in how consumers buy food.

Cheap, But Are They Tasty?
Valuations for many U.S. food companies have come down. Some face more portfolio challenges than others.

Sources: FactSet; Credit Suisse

“In the past, you’d walk into a supermarket and see a brand, and a jingle would play in your head,” says Donny Kranson, a portfolio manager at Vontobel Asset Management. “You’d buy the same brands as everyone else, because we were all watching the same three television channels in prime time.” He says what has happened today can be summed up with one word: fragmentation.
Shoppers, especially younger ones, learn about products online from friends, bloggers, YouTube celebrities, and so on. The shift to online shopping has opened infinite shelf space for niche products. Barriers to entry for food upstarts are low.
“Reviews on and other online stores level the playing field,” says Kelly Flynn, a portfolio manager at Winslow Capital Management. “Companies no longer have to invest in brands over decades. You can read online reviews and see thousands of people who gave a product five stars.”
Customer tastes have splintered. Some want gluten-free. Others, low-carb for so-called keto diets. Many want simpler ingredient lists and virtuous treatment of workers and animals. Those who can afford it look for artisan foods, not megabrands.

According to Credit Suisse analyst Robert Moskow, an early bear on packaged food in general and Kraft Heinz in particular, the combined market share of the top 20 packaged-food companies fell to 42.4% last year from 46.8% in 2011. Much of the lost share has gone to niche and entrepreneurial brands. Moskow recently calculated that among the 20 best selling foods and beverages on, more than 70% were created by start-ups. These include a brand of coconut oil called Viva Naturals, which is riding the keto craze, and a snack called RXBar, whose maker was bought by Kellogg in 2017.
It isn’t just niche brands that are taking share. In a recent CNBC interview, big Kraft Heinz shareholder Warren Buffett noted the popularity of Kirkland, a store brand at Costco (COST). Indeed, private-label brands have gained more than a full percentage point of market share since 2011, reaching an estimated 19.5% last year.

That’s part of a broader power grab by grocers. Rising competition is forcing smaller players out of the grocery business, gradually consolidating control in the hands of a few huge, data-savvy players. Barron’s recommended Kroger (KR) stock at about $24 last May, but advised taking profits in November at $31. It’s slightly lower now. Last fall, it described its fastest-growing customer type as “very price- sensitive” and boasted about growing share for its in-house brands.
Packaged food has been in upheaval for years, but investors ignored some of the trouble signs when interest rates were at historic lows and plump dividend yields were scarce, Flynn of Winslow Capital says. Now, flaws are getting closer attention. Big Food has been cutting advertising spending for years to follow the example of investor 3G Capital, which had trimmed overhead and boosted margins at Kraft Heinz.
The payoff isn’t immediately clear. The group increased earnings per-share by 7% last year, but without tax cuts, it would have posted a 2% decline, Moskow reckons. By his math, 30% of products sold by big food companies face structural challenges. For Kellogg, Smucker, and Kraft Heinz, the number is 40% or higher.
Overseas Fare
European operators might have a head start on American ones in catering to fragmented markets and tastes.

Showing 1 to 3 of 3 entries
Source: FactSet
Let’s not overstate the downside. The big food companies of tomorrow are likely to be the big food companies of today, says Deutsche Bank analyst Rob Dickerson. For one thing, there is no substitute for their scale. “These companies are half innovation and marketing and half logistics and distribution,” he says. “Without Big Food there’s no food, because you don’t have that kind of capacity anywhere else.”


Niche brands often sell to giant ones once order volumes balloon. For example, trendy SkinnyPop, made from just popped corn, oil, and salt, was snapped up by Hershey (HSY) last year.
And the food giants aren’t standing still on innovation. “It isn’t like they’re ignorant,” Dickerson says. “They completely understand what’s going on, and there are thousands of people at these companies working to grow.” But they will have to spend to find new winners while divesting losers, he says. And that could dampen growth for now.

It’s possible to find winning food investments in the absence of earnings growth​ if the price is attractive enough. Last April, Barron’s made a case for General Mills (GIS). It has since returned 12%, including dividends, versus 6% for the S&P 500 index. Its experience shows why investors should resist forming one-size-fits-all theories about what’s working in food.
At a recent investment powwow called CAGNY 2019, for Consumer Analyst Group of New York, General Mills management touted virtues like waste reduction and on-trend products like Blue Buffalo organic pet foods, which the company bought last year. But it has also enjoyed healthy demand for naughty treats, like Lucky Charms cereal.
Still, we hesitate to recommend a second helping of shares at their now-higher price, with earnings per share expected to decline slightly for the fiscal year ending in May.

European (WHO BAN GMO) food companies, including Unilever (UN) and Nestlé (NSRGY), \are better-positioned than their American peers for now, says Vontobel’s Kranson, for two reasons. They hail from countries that are small relative to the U.S.—Unilever is Dutch and British, and Nestlé is Swiss—and so were forced early on to expand into diverse markets with localized tastes. That makes them well-suited for the current fragmentation of food demand. They also have ample exposure to emerging markets, where growth is relatively fast.
One American company Kranson likes is Mondelez International (MDLZ), for its healthy mix of overseas sales and its exposure to snacks, which are enjoying above-average growth. Deutsche Bank’s Dickerson likes Mondelez, too, as well as a smaller U.K. outfit called Nomad Foods (NOMD), which sells frozen food in Europe under the Birds Eye and other brands.
As for the U.S. heavyweights, they are the most appetizing they have been in years in terms of stock valuations, but the growth recipes still need work. Best to wait before digging in.
Write to Jack Hough at

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