Food Stocks: 2 Winners, 2 Losers in the California Drought

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The headline “California drought to drive up food prices in the long term” says it all.

california-drought-food-pricesThis past year was the driest on record, and 2014 is shaping up to be even worse. Since the beginning of the year, the commodity food-price index is up 19% with no relief in sight.

With food prices spiraling higher, there’s no question that consumers will be feeling the pinch.

But those with an active eye on the stock markets should also be wondering which stocks will be the most affected by California’s water shortage.

Two big areas of concern are produce and natural food stocks — but they’re not all going to feel the pain from the California drought. A couple could actually walk away better for it. So, here’s a look at two winners and losers from the California drought.

California Drought Winner: Calavo Growers (CVGW)

california-drought-Calavo-Growers-CVGWCalavo Growers (CVGW) is a global leader in the avocado industry. Although it got its start in California way back in 1924, it now obtains much of its avocado supply from Mexico, Columbia and Peru.

And with avocado prices expected to jump as much as 28% as a result of the California drought, CVGW stock is primed for takeoff.

Already up double digits so far in 2014, I’d look for Calavo Growers to continue reporting excellent results like it did in the first quarter, growing revenues by 21% to $168 million with an operating profit of $5.4 million, or 26% higher year-over-year. Avocado consumption is exploding, and the U.S. wolfed down 1.7 billion pounds of avocados in 2013. That’s great news for CVGW stock.

California Drought Loser: Chiquita Brands (CQB)

california-drought-food-prices-cqb-stockArizona State University’s study of rising food prices projected that packaged salads would increase by a maximum of 13% as a result of the California drought, which isn’t ridiculous. However, lettuce — a main component of those products — could jump as much as 34%, putting a dent in profits.

Chiquita Brands (CQB) owns Fresh Express, which has the top market share in the U.S. for branded retail value-added salads. In 2013, it generated revenue of $967 million, 1.5% higher year-over-year. That’s the good news.

The bad — it lost $8 million on close to a billion dollars in revenues.

Salads represent 29% of Chiquita Brands’ overall revenue. When and if these maximum increases in food prices kick in, CQB stock will be hit hard. Having just come off a $180 million impairment in 2012, the California drought is absolutely the worst thing it could be facing at the moment.

CQB stock is up 63% in the past 52 weeks. It’s about ready for a breather.

California Drought Winner: Tyson Foods

california-drought-tsn-stockCattle inventory in the U.S. is currently at levels not seen in decades. As a result, beef prices have shot through the roof, hitting an average price per pound of $5.29 for choice grade ground steak.

With the California drought affecting the demand for beef, poultry is expected to take its place come the summer grilling season. The USDA expects per capita poultry consumption to hit 101 pounds in 2014, 1.4 pounds higher than in 2013.

The major beneficiary of higher beef prices combined with higher consumption of poultry is Tyson Foods (TSN), the nation’s largest producer of beef and poultry. In the first quarter ended Dec. 28, 2013, Tyson’s chicken revenue grew by 2.1% thanks to a 3.6% increase in volume offset by a 1.4% decrease in average prices. However, its operating margin for chicken was 7.5% in Q1 — 370 basis points higher than a year earlier. As a result, chicken accounted for 55% of its overall operating profit in the quarter.

With consumers expected to ramp up their chicken purchases (and pork) at the expense of beef, investors can be fairly confident that Tyson’s near-term quarterly reports will be equally as impressive. With food prices on the rise, TSN stock is sure to follow.

California Drought Loser: WhiteWave Foods

california-drought-wwav-stockOne of the hottest trends in natural foods these days is plant-based milk. Whether it’s soy or almond, Americans are slowing sticking their toes into the alternative milk market.

WhiteWave Foods (WWAV) is a beneficiary of this experimentation.

According to the company, almond milk now represents 55% of plant-based milk products, with soy trailing at 35%. Meanwhile, WWAV also says that almond-based beverages have been one of the fastest growing subcategories in the U.S. consumer packaged food and beverage industry over the past three years. WhiteWave’s plant-based food and beverages now represent 41% of its overall revenue.

Considering that the company is experiencing considerable growth — annual revenues have steadily been climbing for years — it’s no wonder that WWAV stock is up 25% year-to-date and 75% in the past year.

But here’s the thing: Almond prices have risen steadily in the past year partly as a result of the California drought. Furthermore, these drought conditions are unlikely to abate much in the next few months. WWAV will be forced to increase prices. So while almond milk is the latest and greatest when it comes to milk alternatives, it’s unknown whether consumers will accept increased food prices on the almond milk side passed on by the grocery store chains.

With WWAV stock priced to perfection — enterprise value is 19 times EBITDA — any serious blowback by customers could result in a loss of momentum, which would surely result in some of its gains in 2014 being wiped away.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/04/california-drought-food-prices/.

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