For at least the past few years, the food sector has been in consolidation mode. In some cases, companies engaged in mergers and acquisitions simply to enter fast-growing segments of the food and beverage sector, i.e. General Mills (GIS) acquired organic food maker Annies and Campbells Soup (CPB) bought salsa and hummus-maker Garden Fresh Gourmet.
Other deals, such as the merger between Kraft and Heinz, were made to take advantage of synergies between companies and to increase their geographic and/or product diversity.
The consolidation trend looks to be continuing, as shown by Anheuser-Busch’s (BUD) rumored bid for SAB Miller (SBMRY), as well as by a report that nut distributor Diamond Foods (DMND) has been in talks about selling itself to a number of “strategic suitors.”
So which food stocks should investors buy in an effort to take advantage of this trend?
Within the sector, WhiteWave Foods, (WWAV), Hain Celestial (HAIN), Hormel Foods (HRL) and John B. Sanfilippo & Son (JBSS) all have characteristics that could make them attractive takeover targets in the near to medium-term.
In addition to their status as potential M&A targets, all four food stocks have other positive attributes: WWAV and HAIN have strong growth prospects; HRL should benefit from pro-protein trends around the world; and Nut distributor John B. Sanfilippo & Son is benefiting from the inclusion of nuts in a number of popular diets.
Investors should buy all four of these food stocks.
Food Stocks That Could Get Gobbled: WhiteWave Foods (WWAV)
Widely seen as healthier than cow’s milk, WhiteWave’s plant-based milk products are category leaders. The increasing consumption of these products has enabled the company to grow rapidly; and in the second quarter, the company’s net sales jumped 10%, while its per share earnings, excluding the impact of an acquisition in China and currency fluctuations, surged 16% year-over-year.
WhiteWave’s strong growth could appeal to food companies with large amounts of cash and product portfolios that are not appealing to younger generations. Companies in this category include Kellogg (K), Campbell’s, General Mills, ConAgra (CAG), Coca-Cola (KO) and Pepsi (PEP).
WhiteWave would be a particularly intriguing M&A target for Kellogg and Coca Cola, as well as French yogurt giant Danone (DANOY).
Like General Mills, Kellogg’s core products are struggling; but unlike General Mills, it hasn’t made any major acquisitions to rejuvenate its weak organic products business yet. And Coca-Cola has shown in recent years that it is looking to aggressively expand its portfolio and add more popular products, having bought large stakes in Monster Beverage (MNST) and Keurig Green Mountain (GMCR).
Danone calls the U.S. “an emerging market,” and buying WhiteWave would obviously make the French company a much bigger player here.
Moreover, WhiteWave’s subsidiary in China can grow, and it can expand into new markets in Asia, where soy milk consumption has historically been quite high. (The company has a subsidiary in Hong Kong and it has a 49% stake in a joint venture in china, but it does not appear to have entered other Asian countries.) A huge corporation that already has distribution capabilities in Asia would facilitate WhiteWave’s entrance into new Asian markets.
And as William Blar analyst Jon Andersen pointed out on Sept. 4, WhiteWave’s results should become even more attractive “as the large millennial generation matures and forms households.”
Even if WhiteWave is not acquired, strong growth and tremendous potential make WWAV one of the most attractive food stocks in the market.
Food Stocks That Could Get Gobbled: Hain Celestial (HAIN)
Andersen also expects Hain Celestial, another organic food maker, to benefit from accelerated household formation by the millenials.
Like WhiteWave, Hain Celestial has one of the highest growth rates in the food sector. The company’s net sales jumped 19.6 % in its fourth quarter ended in June vs. the same period a year earlier, while its operating income surged 12.9% year-over-year, excluding certain items.
Although acquisitions contributed significantly to Hain’s growth and the sales of its existing operations actually appear to have fallen last quarter, dragged down by a 7.8% sales decline in the U.K., the company provided solid 2016 guidance. It predicted that its net sales would increase 10% to 15%, while its EPS is expected to rise 12% to 20%.
HAIN stock has not been one of the better food stocks this year, as the shares have given back about 8% in 2015. Investors are probably worried about the weak performance of the company’s sizable U.K. operations and its lack of organic (no pun intended) growth.
However, the food maker’s guidance indicates that it is well positioned for strong growth going forward, and, as Andersen points out, HAIN stock should benefit from the growth in popularity of organic food.
Food Stocks That Could Get Gobbled: Hormel (HRL)
Another attractive food stock for both retail investors and conglomerates looking for growth opportunities is Hormel.
Trading at a market cap of around $17 billion after its stock doubled since the beginning of 2013, Hormel would be an expensive M&A target. But some buyers, including Berkshire Hathaway (BRK.A, BRK.B), private equity firms and Chinese conglomerates that could obtain massive loans from Chinese banks, could possibly afford to pay $21 billion or a bit more to buy Hormel.
World protein demand is expected to rise strongly over the long-term, making protein producers an attractive investment. (That trend was the motivating factor behind the takeover of pork producer Smithfield Foods by a Chinese company in 2013 and Tyson Foods’ (TSN) $7.7 billion acquisition of Hillishire Brands last year. )
Meanwhile, a number of acquisitions by Hormel in recent years have enabled it to move beyond its traditional fare, such as spam and pepperoni, and into more healthy, exotic and snack-oriented areas. The consumption of natural/organic, snacking, and more exotic foods have all become much more widespread in recent year.
Hormel acquired guacamole maker Wholly Guacamole in 2011, bought Skippy peanut butter in 2013 and acquired Muscle Milk-maker CytoSport in 2014. The latter company “addresses nutritional opportunities,” i.e. protein enhancement, Food Business News quoted Hormel CEO Jeffrey Ettinger as saying recently. Of course, obtaining has become an important issue for millennials and many others in the U.S. And this year, Hormel looked to capitalize on the natural/organic trend by buying Applegate Farms, which develops natural and organic processed meats and poultry products.
So any company that buys Hormel could benefit from increased consumption of protein around the world, while obtaining several units whose products are exactly in-line with major trends.
Food Stocks That Could Get Gobbled: John B. Sanfilippo & Son (JBSS)
Nuts are a component of at least five of contemporary America’s eight most popular diets: The Mediterranean Diet, the Raw Food diet, The Zone Diet, the Vegan Diet and the Vegetarian Diet.
So it’s not surprising that nut distributor John B. Sanfilippo & Son has been doing well. The company’s net income jumped 11.5% in its fourth quarter ended in June vs. the same period a year earlier, while sales rose 9% year-over-year. In all of fiscal 2015, its net sales surged 14%.
JBSS stock jumped 67% over the last year, but its market cap is only $600 million, making it an easy food stock to digest for companies in the sector that are saddled with unpopular products.
And even if it’s not acquired, the company offers investors strong growth and one of the most attractive performances of any food stock in the market.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.