6 Food Manufacturers with Strong Balance Sheets and Good Valuations

Thisis the time of year when we tend to have food on our minds. With Thanksgivingkicking off the season of feasting, perhaps investors should think about thecompanies that help make all of this food. I track a universe of 42publicly-traded companies, and, like I did lastyear at this time, I want to see if there are any potential bargains forconservative investors.

Thefood group has experienced a range of performance in 2011, with a few stocksdeclining in excess of 50% and a couple rising by that much or more.  More typically, the stocks have increasedabout 6%, slightly better than the market in general.

Onthe one hand, investors are seeking out stable companies that are capable of maintainingor even boosting above-market dividend yields. Most of the 42 stocks pay a dividend, with an overall median of about1.4%, but ten of the companies have yields of 3% or higher. 

Onthe other hand, performance has been tough for many of these companies, as theyare contending with very strong input cost inflation.  Another challenge has been a shift towardsprivate labels.  Just like the group hashad very different price performance, earnings performance has varied aswell.  In fact, 15 of the companies haveseen earnings per share decline over the past year,

Ithink it’s worth examining the sector again.  First, in a continuing weak economy, the relative growth of thesecompanies could look good compared to the market in general.  Second, while some of the companies haveinternational exposure, many are more focused on domestic sales.  In an environment of a strengthening U.S.dollar, investors may turn to these companies that don’t have foreign currencyrisks.

Intrying to decide how to narrow down the universe of companies that make food, Iwanted to find names that have strong balance sheets and low valuations.  So, I went “shopping”, with the followingparameters in mind:

• Market Cap > $500mm
• Net Debt to Capital < 20%
• EV/EBITDA < 9X

Here arethe 6 names left in our basket:

Keep inmind that these are not recommendations. You should do your own research before making any buy decision. 

Lastyear, eleven stocks met our criteria. Why did fewer make the cut this year? Quite simply, it’s valuation. Noneof these stocks stands out in terms of dividend yield compared to the overallmarket.  I believe that so much recentfocus on dividends has forced up valuations. In fact, of the six names with above-market dividend yields last year,only one made the list this year, Cal Maine Foods (CALM).

I don’tcurrently include any of these stocks in my model portfolios, but I have ownedCALM and Hormel Foods (HRL) and follow them closely.  Of the two, egg-producer CALM looks moreinteresting to me at the moment because their input costs have really hurt thembut are now improving.  The company paysout 1/3 of net income in dividends, so the dividend varies fromquarter-to-quarter.  While HRL’svaluation isn’t particularly cheap, I believe it’s an excellent company.  Note that it has increased dividends in eachof the past 30+ years.

I believethat the token dividend, the high dollar price of the stock, the fact that it’snot in a Standard & Poor’s index and the lack of analyst coverage as wellas some earnings variability all have contributed to a very inexpensivestock.  Another thing to look for here isconsiderable insider ownership. 

Screeningis a tool to identify stocks to study more closely for potentialinvestment.  In this case, we have identified6 stocks that meet several criteria important to conservative investors.  In a continuing environment of slow economicgrowth and low bond yields, some of these stocks could generate enthusiasmamong investors in 2012.

Regards,

Alan BrochsteinFounder, InvestBy Model and AB AnalyticalServicesTradeKingAll-Star Commentator

Disclosure:  Alan Brochstein does not hold any positionsmentioned in this blog post.

Inreading content in the Trader Network, you may gain ideas about when, where,and how to invest your money. Although you may discover new ideas or rationalethat may be compelling, you must ultimately decide whether or not to put yourown money at risk. Consider the following when making an investment decision:your financial and tax situation, your risk profile, and transaction costs.

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TradeKing selects and defines as All-Starscertain independent market commentators who are recognized industrypersonalities and experienced traders and who provide timely market commentaryvia the TradeKing All-Star blog at http://community.tradeking.com/members/tk-all-star/blogs.Each All-Star commentator’s bio, related qualifications and disclosure as totheir relationship with TradeKing can be found on the All-Star blog roster,available at http://community.tradeking.com/members/tk-all-star/details.The selection of All-Stars commentators is solely based on the quality andstyle of the content provided. TradeKing does not measure, endorse, or monitorthe performance or correctness of any statement or recommendation made byindependent All-Stars commentators on TradeKing.com. Supporting documentationfor any claims made in this post will be supplied upon request by the author ofthe post, Alan Brochstein, who is solely responsible for the views expressedhere. Send a private message to All-Stars using the link below the profileimage.

Any strategies discussed and examples usingactual securities and price data are for educational and illustrative purposesonly and do not imply a recommendation or solicitation to buy or sell aparticular security or to engage in any particular investment strategy. Inreading content in the Trader Network, you may gain ideas about when, where,and how to invest your money. Although you may discover new ideas or rationalethat may be compelling, you must ultimately decide whether or not to put yourown money at risk. Consider the following when making an investment decision:your financial and tax situation, your risk profile, and transaction costs.