by Will Ashworth | September 20, 2013 9:15 am
Packaged food stocks started the year off strong, but have slowed down in recent months. In fact, packaged foods stocks as a whole have underperformed the S&P 500 by around 5 percentage points year-to-date.
So is there any value left in the sector?
Well, General Mills (GIS) reported respectable first-quarter earnings earlier this week, with revenues increasing 8% to $4.4 billion and adjusted diluted earnings improving 6% to 70 cents. More importantly, though, the packaged foods company maintained its fiscal 2014 outlook.
And while the stock fell around 3% yesterday after Wells Fargo downgraded it and JPMorgan lowered its price target, it’s still gained a solid 20% year-to-date — right on pace with the broader market.
Another play is Hillshire Brands’ (HSH) — a stock whose fiscal 2013 can best be described as a bounce-back year. The former Sara Lee business began a three-year strategic plan at the start of it, with the goal of fixing, driving and expanding business. The four targets for the end of 2015 are: annual volume growth of at least 2%; minimum revenue growth of 4%; marketing, ads and promotion (MAP) spend upped to at least 5% of total revenue; and a 10% operating margin.
With another two years left to achieve its targets, the company is already well on its way. MAP spending came in at 4.4% in fiscal 2013 (which ended June 29), while volume growth was only 60 basis points of its target and operating margin in 2013 was only 240 basis points off its target.
The only red flag: There’s a lot of work left on the top line, as net sales fell by 1%. Still, the company is definitely moving in the right direction. No wonder CEO Sean Connolly said in the company’s most recent earnings release:
“Our strong businesses became stronger and we made progress on our challenged businesses … As we look to fiscal 2014, we expect performance to gain momentum through the year. As we exit fiscal 2014, our company will be significantly stronger … and well positioned for fiscal 2015.”
The cherry on top: Hillshire Brands’ enterprise value is 8.5 times EBITDA, which compares favorably to General Mills’ multiple of 11.2. Hillshire Brands is getting stronger both financially and operationally. At current prices, it’s a better bet than General Mills.
We also can’t forget about Dean Foods (DF), though. In late July, the company complete its transformation by closing its spin-off of WhiteWave Foods (WWAV). Now, the company is solely focused on milk, which made up 74% of its 2012 revenue, and complementary dairy products. In fact, it’s the largest U.S. producer and distributor of fluid milk, cranking out 3 billion gallons of milk annually — almost five times its next largest competitor.
Dean Foods intends to grow its business by investing in research and development and coming up with additional, value-added products and extensions. It expects results from its increased R&D to show up in 24 to 36 months. Additionally, the company intends to find $120 million in cost savings in 2013 through a combination of plant closures and increased operating efficiencies.
By creating new revenue streams while maintaining proper cost controls, Dean Foods should grow free cash flow and then pass it on to shareholders. Plus, while milk isn’t sexy, I don’t see it going away anytime soon. DF wouldn’t be my first pick if I had to put together a portfolio of 20 stocks to stand the test of time, but it’s not a dog either.
The bottom line is that most of the big packaged foods stocks currently have enterprise values between 11 to 13 times EBITDA, while Hillshire Brands and Dean Foods both are well below that. General Mills, which also brings a 3% dividend yield to the table, remains the safest bet of the group.
But if you’re looking for deep value, I think Dean Foods’ future could be better than most predict — although I wouldn’t go and bet your entire retirement portfolio. And if you’re looking for a stock that could really surprise the next one or two years, Hillshire Brands is your bet.
Don’t write off packaged foods stocks just yet.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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