Let’s analyze three food companies to see how they handle the pressure.
Main focus on growth and expansion
H.J. Heinz Company (NYSE:HNZ) has a global portfolio of leading brands in the ketchup and sauces, meals and snacks, and infant nutrition categories. Recently acquired by Berkshire Hathaway Inc. (NYSE:BRK.B), the Warren Buffett-led investment group, and 3G Capital for $28 billion, H.J. Heinz Company (NYSE:HNZ)’s business and iconic brands will expand even further.
Since fiscal year 2008, H.J. Heinz Company (NYSE:HNZ) has been increasing its investments in marketing almost 10% each year. Management focuses on driving growth in its 15 core brands, which recorded 5% organic growth in fiscal year 2012. Growth perspectives are good for the company. Global ketchup sales grew 8%, reaching more than $5 billion in fiscal 2012. Since the ketchup and sauces category represents almost half of the company’s sales, I expect Heinz to profit from a market that has not yet reached its full potential.
Ralcorp acquisition starting to show results
ConAgra Foods, Inc. (NYSE:CAG) is one of North America’s leading food companies, serving restaurants, grocery retailers, and other food service establishments. The company’s EPS for 3Q13 was $0.55, only $0.04 higher than the prior-year quarter. Net sales grew 13.4%, reaching $3.85 billion, driven by contributions from acquired businesses and increased volumes. On the other hand, operating profit is in decline, reaching 11.8%, against 14.2% in 3Q12 due to a rise in operating expenses.
In January 2013, ConAgra Foods, Inc. (NYSE:CAG) acquired Ralcorp Food Group, subsequently hitting a record in revenue. Ralcorp generated $292 million in sales and $22 million in operating profits during the quarter, reinforcing the company’s finances and strategic position in the frozen bakery and food products categories. In addition, the company’s plans to form a new mill, along with Cargill and CHS, are expected to outplace ConAgra Foods, Inc. (NYSE:CAG)’s current earnings.
ConAgra Foods, Inc. (NYSE:CAG) has a strong B2B presence and well-positioned brands focused primarily in the North American market. However, the company’s debt is growing due to the Ralcorp acquisition and a 30% YoY increase in marketing expenditures.
Cost savings, innovation, productivity improvements
Kraft Foods Group Inc (NASDAQ:KRFT) is a consumer packaged food and beverage company focused on convenient meals, refreshment beverages and coffee, cheese, and other grocery products.
The company reported earnings of $0.88 per share for 1Q13, surpassing most analysts’ estimates. Net revenue increased 2.1% YoY, reaching $4.55 million, carried mostly by advertisement and innovation investments. Organic revenue increased 2.1% as well, driven by volume gains and improved product-mix.
I am very optimistic about Kraft Foods Group Inc (NASDAQ:KRFT)’s 2012-2014 restructuring program. Its efficiency improvement and cost-reduction initiatives will liberate important cash to be used in more innovation and brand-building investments. Management is focused on building cash flow, and plans to dedicate it to pay strong dividends as well, which is always a good sign for investors. Kraft Foods Group Inc (NASDAQ:KRFT)’s 2.5% annual net productivity savings target is key.
Bottom line
The acquisition of H.J. Heinz Company (NYSE:HNZ) validates the company’s solid organic growth, improvements in the emerging markets, cost saving initiatives, and strategic direction. Warren Buffett would not invest in a company without value potential.
ConAgra Foods, Inc. (NYSE:CAG) lacks substantial overseas presence and has not announced plans to expand these operations. I remain neutral on the stock, as a downturn in the American economy could affect the company’s revenue.
Kraft Foods Group Inc (NASDAQ:KRFT)’s bottom-line improvements are encouraging, but the company still requires work on improving its top-line growth a bit more. I will remain neutral on this stock until I see improvements on this front.
The article 3 Consumer Goods Companies and the Issues Ahead originally appeared on Fool.com and is written by Damian Illia.
Damian Illia has no position in any stocks mentioned. The Motley Fool recommends H.J. Heinz Company. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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