Food Products
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K $80
KLG $18 GIS $75 06 Sep 2024 |
Candy bar maker Mars to buy snack maker Kellanova for $36 billion
From the start, we wrote disparagingly of cereal maker Kellogg's plans to split into multiple entities. Even before that strategic event, we had little respect for the company's management team, strongly favoring competitor General Mills (GIS $75) instead. Ultimately, the financial engineering feat took place last year, with WK Kellogg (KLG $18) retaining the $2 billion cereal business, and spin-off Kellanova (K $80) retaining the long-time stock symbol and the snacking business. Now, lo and behold, the latter entity has found a suitor willing to pony up big bucks to buy the firm. Mars, one of the largest privately held companies in the US and maker of a vast line of confectionary snacks, has agreed to buy Kellanova for $36 billion, which includes the assumption of $6 billion worth of debt. That equates to about $84 per share, or a 40% premium to where the shares were trading prior to the announcement. With the acquisition, Mars will be buying such brands as Eggo, Pringles, Pop-Tarts, Cheez-Its, and dozens of other household names. The packaged-food aisles of the grocery store have been under strain for the past several years, as consumers continue to gravitate toward healthier options. The size of the deal makes it one of the largest M&A moves in recent memory within this industry, and may well spur other similar deals. Recall that Kellogg CEO Gary Pilnick was the brilliant C-suite executive who recently suggested that families struggling with food inflation start eating cereal for dinner. ("Let them eat Froot Loops!"?) Meanwhile, Kellanova CEO Steve Cahillane is expected to leave that firm after the Mars deal is completed. As we haven't invested in Kellogg's in decades, the deal really doesn't affect us, though we do believe Mars can make it work. The company's vast distribution network and strong management team will take this moribund (or at least lethargic) company and breathe new life into the brands. As for competitor General Mills, which also owns the Blue Buffalo pet food line, we have owned it within the Penn Global Leaders Club since 2017. |
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SJM $132
TWNK $33 11 Sep 2023 |
JM Smucker will buy iconic Twinkies brand for $5.6 billion
It seems hard to believe, but just over a decade ago there were no Twinkies to be found on any grocery shelves—well, except for really expired ones (actually, we don’t think they have an expiration date). The iconic little crème-filled delights, which began rolling off the Continental Baking Company assembly lines in 1930, went out of production in 2012 when Hostess Brands declared bankruptcy and liquidated. Sadly, Ding Dongs and Hostess CupCakes—that staple dessert in my brown lunch bag at Golden Oaks grade school, were also victims of the shutdown. As luck would have it, Private Equity Firm Apollo Global Management rode to the rescue, picking up Hostess for a song ($410 million), and taking the firm public once again in 2016. Between 2016 and a few weeks ago, the market cap of Hostess (TWNK $33) rose from $450 million to around $3 billion. Then came the offer: JM Smucker (SJM $132), the famed sweets and jellies company which has been family run since 1897, would buy Hostess for $5.6 billion in cash and stock. Shareholders would receive $30 in cash and a fractional share of SJM for each TWNK share owned, which represented a whopping 54% premium to the recent stock price. The Wall Street Journal reported that Smucker beat out Penn Global Leaders Club member General Mills (GIS $66) with its winning bid. The purchase caps an incredible comeback for the Twinkie, not to mention other Hostess brands such as the aforementioned Ding Dong and Hostess CupCakes, as well as Voortman brand cookies, Dolly Madison cakes, Donettes, HoHos, Zingers, and SnoBalls. The Lenexa, Kansas-based firm’s products will now join the likes of Folgers Coffee, Smucker’s jelly, Jiff peanut butter, and Milk Bone dog biscuits. Quite the coup. We love the deal, but it will increase Smucker’s 60% debt-to-equity ratio substantially, which investors recognized by pounding the stock down 7% on the news. We continue to prefer General Mills in the space, and believe it remains at least 25% undervalued. In addition to its cereal line, General Mills owns such brands as Betty Crocker, Annie’s, Nature Valley, Pillsbury, Haagen-Dazs, and the Blue Buffalo line of premium pet food products. |
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GIS $79
27 Sep 2022 |
Bucking the trend: Penn member General Mills has rallied 20% this year
Virtually all asset classes, sectors, and industries are in the red this year with the exception of energy stocks, and even they have been tumbling recently as crude oil has dropped back to where it began the year—the mid-$70s-per-barrel range. One consumer defensive name has been bucking the trend, however: General Mills (GIS $79) has rallied 20% so far in 2022—hitting an all-time high price last Thursday—and is up some 34% over the past year. Not only did the century-old food products firm report higher-than-expected profits over the past quarter, management also lifted its forecast for the year. Sales in the fiscal first quarter, which ended 28 August, rose 4% (to $4.72B), while net income jumped 31% from the same period last year—to $820 million. While inflation has raised input and shipping costs for General Mills, the company has been able to pass along some of those higher prices to a consumer which is suddenly eating out less and cooking more meals at home. The stellar management team, led by 55-year-old Jeff Harmening, has also been making some astute strategic moves recently. In an effort to focus on more profitable units, the company recently sold its “Helper” line and Suddenly Salad packaged food division for $607 million, while acquiring St. Louis-based TNT Crust for $253 million. While consumers have been shifting away from higher-priced labels in favor of generic brands, General Mills products remain in the sweet spot. Harmening’s team also placed some well-timed hedge positions on grain inputs, cushioning the blow of rising agriculture prices. For the fiscal year, the company expects to grow net sales by 6-7%. One of our favorite moves General Mills made a few years ago was the purchase of the rapidly growing Blue Buffalo line of pet foods. In fact, that was a catalyst for our purchase of GIS shares back in 2018. The company is the only packaged food name within the Penn Global Leaders Club. |
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K $69
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Kellogg to break into three companies; does anybody care?
(21 Jun 2022) Five years ago, we wrote a brief piece on Kellogg’s (K $69) hiring of a new CEO after floundering for years under chief executive John Bryant. We expressed doubt that Steven Cahillane would be any different. At the time, K was sitting around $70 per share. Confirming our concerns, the shares have barely budged since. So, what does a mediocre company do to move the needle on its share price? Announce a plan to split into multiple entities, of course. Sure enough, shares of Kellogg opened the week up nearly 4% after management announced it would break into three pieces: a global snacking company, a North American cereal company, and a plant-based food company, names to be decided at a later date. We are not talking about GM spinning off its financing unit (remember GMAC?) or GE spinning off its jet-leasing unit; we are talking about a food company spinning off…food companies. Aren’t all three units within the core competencies of a packaged food manufacturer? Right out of the mediocre manager playbook, CEO Cahillane said that the standalone companies will now be able to “direct their resources toward their distinct strategic priorities…and create more value for all stakeholders….” What a bunch of gobbledygook. Milquetoast executives throw out terms like “unlock value” as if a split would magically open corporate treasure chests which the crackerjack team had just been unable to open in the past. Really? All of the talent at your fingertips and you just couldn’t crack the code, but now you will be able to? What will be fun to watch next is how many middling analysts get excited by this move and upgrade the shares. Insert eye roll emoji here. Full disclosure: We own Kellogg’s chief competitor, General Mills (GIS $68), in the Penn Global Leaders Club. |
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OTLY $9
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Oatly shares just plummeted another 21% in one session, now down 68% from their high
(15 Nov 2021) We first wrote about oat milk products company Oatly Group AB (OTLY $9) when the Swedish firm went public back in May. After the IPO priced at $17, shares rose 37% almost immediately. By the 16th of June, they had topped out at an intra-day high of $29 per share. We believed they were overvalued from day one, and reminded investors of the competition in the space. Just because a company appears to be in the stream of a fast moving theme—like plant-based products, they are not automatically good investment candidates. That is a story we have seen in constant reruns for the past 25 years. Alas, reality just hit OTLY shares after the company reported a revenue miss, greater losses than expected, and a warning from management with respect to the full-year's guidance. On top of the dismal financials, it was also reported that a quality issue in one of Oatly's production facilities will result in destroyed product and lost sales in the EMEA (Europe, Middle East, Africa) region. Perhaps the worst news of all: arch-competitor Chobani has officially filed to go public, and Danone, owner of the Silk brand of plant-based "milks," announced it is doubling-down on its "Oat-Yeah" product line. Oatly had a rough summer; it appears that the company is headed for an ugly winter. When we first wrote of Oatly's debut, we said the shares were overvalued but might be worth a look if they dropped below $20. They are now sitting at $9.36 and still don't seem like a bargain. We can't figure out what the company's unique value proposition is, and even its commitment to the ESG (the most overused acronym in the global corporate environment) movement is being questioned by the environment police. Shares may seem cheap, but we wouldn't touch them. |
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GIS $60
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Center aisles of the grocery store dead? General Mills' latest earnings report tells a different story
(27 Sep 2021) We have offered up effusive praise for the management team at food giant General Mills (GIS $60) in recent years, and the company's latest earnings report serves to reinforce our position. While the packaged food business may seem boring at best, or even outdated in this new era of healthy eating, this $36 billion producer of snacks, soups, cereal, yogurt, baking ingredients, and pet food beat on both the top and bottom lines. The company announced quarterly sales of $4.54 billion and earnings per share of $0.99. Both of those figures beat expectations, and were roughly in line with last year's same-quarter numbers. This is impressive in that the world was in the depths of the pandemic last year, which forced consumers out of the restaurants and back into their kitchens. As restaurants have reopened, the company has surprised analysts in its ability to maintain those numbers. Another quite remarkable feat has been the firm's ability to navigate higher commodity prices and supply chain issues; in fact, it has been forced to pass along those challenges to consumers and restaurants in the form of higher prices with very little effect on the financials. For comparison, Campbell Soup Co. (CPB $42) just reported a 4% decline in sales for the quarter ended 01 Aug. The ability to pass along higher costs while maintaining strong sales and positive net income is quite a feat for a company in this industry. The firm's Strategic Revenue Management and Holistic Margin Management programs have been working exceptionally well, hence our belief in CEO Jeff Harmening and other members of the senior management team. GIS shares still look undervalued at $60. With its 16 P/E ratio, 3.5% dividend yield, and defensive characteristics, it continues to be a solid member of the Penn Global Leaders Club. It's relatively recent pickup of premium dog food company Blue Buffalo will also provide a nice catalyst for growth going forward. |
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OTLY $21
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Swedish oat milk company Oatly comes out of the gate hot, but established food players are stepping up the pressure
(26 May 2021) It's an age old story: established players bash a new concept, consumers embrace the new products, and the established players suddenly enter the fray, claiming they were always on board. EVs are perhaps the best example of this, and we remember the Fords and GMs of the world impugning Tesla on a weekly basis...until they suddenly embraced EVs as if it were their idea in the first place. The same is true in the plant-based foods business. Oatly Group AB (OTLY $21), maker of the happy little cartons of "milk" you have probably seen in the dairy section of the grocery store, went public last week. Despite the IPO price of $17, shares shot out of the gate, jumping 37%—to $23.25—within a day. While they have cooled off a bit since, their $21 price still values the company at $12.5 billion—about 50% larger than our favorite plant-based company, Beyond Meat (BYND $123). At $21, are the new shares worth picking up? Plant-based food sales rose an impressive 27%—to $7 billion—in 2020, and the upward trajectory will continue. Silk, which is now owned by Danone (DANOY $15), will probably be the company's chief competitor going forward, but we see Oatly growing its rather faithful consumer base. While it will be a few years before the company is profitable (it lost $60 million in 2020), its revenues doubled last year from the previous year. If shares go below $20, they are worth looking at for investors needing an international play in the consumer staples sector (which you probably do). We believe a lot of investors are not fully grasping just how big the plant-based food movement will become over the next decade. Consider this frontier investing: there will be massive gains to be had, but choose your vehicles carefully. |
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SJM
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Boring old JM Smucker just knocked Q1 earnings out of the park
(25 Aug 2020) We should have seen it coming: In the midst of a lockdown and a mass migration of employees from their office buildings to their new in-home offices, packaged foods sales skyrocketed. Nothing made that more evident than the latest quarterly results from staid old JM Smucker (SJM $92-$121-$126), the 123-year-old, $14 billion packaged foods company. Best known for products such as Smucker's, Folgers, Jif, Crisco, and the like, the Ohio-based company increased earnings-per-share by 50% from the same quarter last year, and overall revenues by 11% from the same period in 2019. While their biggest category, Retail Pet Foods, increased by just 3% year-over-year (after all, the pets have always been at home), the Retail Consumer Foods division saw a 22% jump in sales. President and CEO Mark Smucker also said the firm had raised its fiscal 2021 guidance, now expecting between $8.20 and $8.60 in EPS and nearly $1 billion in free cash flow. Smucker said he expects the momentum to continue post-pandemic as Americans fell back in love with old brands, and as the company rolls out a large new marketing campaign. Time will tell, but the Q1 report was enough to drive the shares up over 7%. The company has a relatively decent P/E ratio of 18 (same as Penn holdings General Mills and B&G Foods), and we would put a fair value on the shares at around $125. That may not seem like much upside, but with its 3% dividend yield and very strong pet foods business, it is a pretty safe bet. |
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TSN
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Tyson Foods plummets after reporting lousy numbers for the quarter, warning of food chain disruption
(05 May 2020) At first blush, if you had to pick one industry holding up well in the pandemic you might say farm products. After all, the hoarding of goods quickly moved from toilet paper and Clorox (CLX) wipes to meat and dairy products. More specifically, you might zero in on US-based poultry providers like Tyson Foods (TSN $43-$55-$94). That is why we did a double take when the $20 billion Arkansas-based chicken, beef, and pork producer announced it had badly missed its Q2 earnings target and warned of more pain to come. So what happened? Part of the reason the company earned just $0.77 per share instead of the $1.20 expected (a 36% miss) has to do with outbreaks of the coronavirus at a number of its plants, forcing their closure. Couple that with the virtually complete loss of foodservice business for the better part of two months—so far—and the numbers begin to make sense. As if those two factors weren't enough to contend with, Chairman of the Board John Tyson warned that the entire food supply chain seems to be breaking. We don't actually agree with Tyson's contention, as the meat supplied by the company is generally sourced locally, and certainly domestically. Nonetheless, his words did cause a number of grocery chains such as Kroger to begin limiting meat purchases within their stores. So, after falling 8% in one day and 40% ytd, is TSN a bargain for investors? Actually, it probably is. While we don't like the excuse-filled earnings report, the shares have a fair value in the range of $75 to $85, conservatively. |
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KHC
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Buffet's Kraft-Heinz dealmaking blunder continues to go south. (18 Feb 2020) Sour grapes? Absolutely. We used to love trading Kraft (formerly KRFT) before Warren Buffet's financial engineering forced the company into the arms of Brazil's 3G, which owned the floundering Heinz (now KHC $25-$27-$49). Just like we used to love owning Burlington Northern Santa Fe (formerly BNI) before Buffet gobbled the company up because he "liked playing with toy railroads as a kid." So forgive us for having a little schadenfreude with respect to the current state of Kraft-Heinz since the forced marriage. Shares of the food products company are now down 72% in the past three years, despite (or aided by) the draconian cost-cutting and employee-slashing tactics that 3G is so well known for. Now comes word that the company's debt has lost its coveted investment-grade status, meaning it is now in junk bond territory—which can lead to a host of new financial troubles for the firm. The company is trying to buy its way out of dire straits through even more acquisitions, but it was forced to end its bid for both Unilever and Pinnacle Foods as of late. With higher input costs and ineffective leadership, steer clear. Sadly, the company owns some iconic lines, like Oscar Meyer and Kraft cheese (obviously). These lines were doing just fine until the Buffet-sponsored takeover. Sad.
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BYND
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Don't look now, but Beyond Meat is up 54% year-to-date, and we are only eight trading days in. (13 Jan 2020) As we have bloviated about any number of times, we bought plant-based "meat" company Beyond Meat (BYND $26-$116-$240) within minutes of it going public back on May 2nd. It came out of the gate trading around $52 per share, and proceeded to climb all the way up to $240/share by mid-summer. We bought Beyond as an investment, not a trade, within the Penn New Frontier Fund, so we did get a little slack when we stood by the firm as the shares came falling back to earth, dropping into the mid-$70s range. Now, all of a sudden, shares of BYND have climbed 54% within eight trading days on the back of very little groundbreaking news. One catalyst came when privately-held competitor Impossible Foods announced it didn't have the product to satisfy a potential McDonald's (MCD) deal, but that was a big nothing-burger: the world's largest fast-food chain was already experimenting with the PLT (plant, lettuce, and tomato) in Canada, a proprietary blend using Beyond Meat's product. We continue to believe that an enormous deal with MCD is in the works. CEO Ethan Brown is a visionary, and a uniquely-dynamic leader. While we aren't ready to compare him to a Jobs or a Musk, we have no doubt that Beyond will continue to be the benchmark alt-meat producer for other to follow. We also believe this industry will climb to a size few currently envision. Would we still buy in at $116 per share? No doubt.
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Tuna
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Bumble Bee files for bankruptcy, sending it into the arms of a Taiwan-based fishery. (25 Nov 2019) This past March we reported on a price-fixing scandal that rocked the canned tuna world. The most surprising fact brought to life in the story: who knew StarKist was not an American firm? Now, that scandal has claimed its first victim, as California-based Bumble Bee Foods will file for bankruptcy after getting hit with a $25 million fine by the US Department of Justice (it still owes the DoJ $17 million). Although based out of California, Bumble Bee was purchased in 2010 by a London-based private equity firm for $980 million. Now that the company is under bankruptcy protection, it has received an offer by Taiwan-based FCF Fishery to buy the firm for $275 million in cash and the assumption of $638 million worth of debt. We have also reported on the woes of "middle aisle" food products companies, as shoppers seek healthier alternatives. Sales of canned tuna, in fact, have dropped by nearly 50% over the past generation. Want to enjoy your tuna without worrying about mercury levels? Check out Safe Catch, Wild Planet, and American Tuna—all offering wild-caught, mercury-tested seafood, and all available at natural grocers or through Amazon.
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BYND
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Our early prediction on Beyond Meat may be coming to fruition. (26 Sep 2019) Within five minutes of its IPO debut, we owned shares of plant-based meat products company Beyond Meat (BYND $45-$154-$240) for our clients, and we added it to the Penn New Frontier Fund. One of our earliest predictions for the company was that, before 2019 was in the books, they would land a huge contract with the world's strongest fast-food chain, McDonald's (MCD). While not a full-blown rollout, the $161 billion restaurant has announced that it will, indeed, begin testing the PLT (plant, lettuce, and tomato) at 28 of its locations throughout Ontario. The PLT is a Beyond Meat burger specially crafted for McDonald's. While BYND shares spiked $16 on the news, analysts still question whether or not the company will ultimately win a big US contract from Steve Easterbrook's company. We don't. They will. Of course there are competitors to Beyond Meat, and certainly more will enter the fray. However, we believe the company's head-start, organizational structure (including supply chain management), and exemplary management will make it the benchmark for this exciting and growing industry for years to come.
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SJM
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After falling 8% in one session, JM Smucker finds itself right back where it was two years ago. (27 Aug 2019) The mantra with respect to investing in the consumer staples space, specifically food products, has been that the inner aisles of the grocery store (think canned goods) are dead while the outside aisles (think organic fruits and vegetables and the like) are driving sales as a new generation of shopper takes the helm. For good or bad, JM Smucker's (SJM $91-$104-$128) stock price seems to buttress that argument. Precisely two years ago, we wrote a story outlining SJM's double-digit, one-day drop on the heels of a lousy earnings report and lowered guidance for 2018. Change the year to 2020, and we can basically leave the rest of the story intact. Management blamed falling coffee and peanut butter prices, in addition to increased competition in the pet-food segment, for the revenue and net income miss for the quarter, and it lowered its full year revenue guidance down to "between -1% and zero." Smucker owns such iconic brands as Folgers, Jif, Smucker's, Crisco, Milk-Bone, and Meow Mix. The Ohio-based company, which has been in business since 1897, now has a market cap of $12 billion. With its 3.3% dividend yield and lower stock price, is SJM a worthy investment? After all, consumer staples tend to be a good defensive play going into an economic downturn. We don't think so. It is sitting right at its fair value, and its 28 P/E ratio is pretty rich for that category. Our one Penn holding in the space continues to be General Mills (GIS), thanks to its exemplary management team, led by 52-year-old CEO Jeff Harmening.
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KHC
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Kraft will delay second-quarter earnings filing, stock plummets yet again. (08 Aug 2019) 63%. That is how far shares of Kraft-Heinz (KHC $27-$27-$62) have fallen since Warren Buffet helped 3G force the two companies together back in 2015. There are a couple of reasons for Thursday's 14% drop in early trading. First, the company disclosed that it would take a $1.22 billion write-down due to the reduced value of both its operations in several emerging markets and a number of product lines, such as Miracle Whip, Velveeta, and Maxwell House. The second shoe to drop was the announcement that the company would have to delay its quarterly filing with the SEC. This comes on the heels of an SEC investigation into KHC's accounting practices and internal controls (which Warren Buffett categorized as a "dispute with its auditor"). As for the $1.22 billion reduction in the book value of assets, it pales in comparison to the $15 billion write-down the company took on its Kraft and Oscar Mayer brands earlier this year. Sitting at their all-time low, are shares of KHC attractive at $27 per share? We could look at the company's P/E ratio, but there isn't one (you need the "E" part of the equation to be a positive number). We could consider management, but that wouldn't lend comfort. Then there there is the industry outlook for a company whose main products reside on the "inner shelves" of the grocery store. Ouch. Not sure what the growth catalyst is, but we can think of a number of reasons for the stock to go lower.
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BYND
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It's not McDonald's, but Beyond Meat just landed at Dunkin'. (24 Jul 2019) Several months ago we predicted that Beyond Meat (BYND $45-$203-$208), the high-flying, plant-based meat company we bought at IPO, would land McDonald's (MCD) as a client by the end of the year. While that has not happened yet, Dunkin' Brands (DNKN) did just become the first national chain to offer a sandwich made with the company's Beyond Sausage product. While the breakfast sandwich will initially be rolled out at Dunkin' stores in NYC, we can expect them at nationwide locations soon. Massive Canadian coffee chain Tim Hortons, owned by Restaurant Brands International (QSR), has already rolled out a similar breakfast sandwich, in addition to offering its customers The Beyond Burger. Shares of BYND have surged recently in anticipation of the company's first quarterly earnings report since going public. Beyond will report its Q2 earnings this coming Monday, with analysts expecting to see $52.7 million in revenue for the quarter.
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CALM
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Cal-Maine shares drop big after quarterly miss, but stage quick comeback. (23 Jul 2019) Based on its rather innocuous industry, it may seem odd that Cal-Maine Foods (CALM $37-$39-$52) has been one of our favorite trading stocks over the years. In fact, America's largest egg producer was once in our Strategic Income Portfolio thanks to its 6% dividend yield and steady revenue stream. The 6% dividend may gone, but the "predictable volatility" of CALM shares remains intact. After reporting a wider-than-expected loss for its fiscal fourth quarter due to an oversupply of eggs on the market (the company actually lost $20 million—as compared to the $72 million in made in the same quarter a year earlier), shares fell about 5%. By the end of the trading day, however, it had clawed back nearly all of those losses. This is a scenario that seems to play out each time the company drops on earnings. Cal-Maine, which owns such brands as Egg-Land's Best and Land O' Lakes, is a great way to play price movements in this ag commodity. Further, we believe that egg prices are sitting in a trough and could easily move higher from here.
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BYND
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Rumor has it that Beyond Meat will land a major fast-food deal before the year is up; a look at its board may offer some clues. (03 Jun 2019) The only regret we have with respect to our purchase, within five minutes of the opening trade, of Beyond Meat (BYND $45-$107-$105) is that we didn't buy twice as much. We believe the company will be a benchmark for the burgeoning plant-based meat alternative industry. In fact, we are more bullish on the space than even the most ardent supporters. Beyond, which is now up over 100% since our purchase one month ago, is rumored to be close to landing a major deal to have its burgers featured at a major fast-food restaurant. We know it won't be Burger King (owned by Restaurant Brands International), which already offers an Impossible™ Whopper, so McDonald's (MCD) would be the next-most-obvious choice. To add fuel to that speculation, consider who sits on Beyond's board: none other than former McDonald's CEO Don Thompson. The chain's current (brilliant) CEO, Brit Steve Easterbrook, has proven he is not afraid to make bold moves, and a growing percentage of fast-food customers are clamoring for a vegan option. Logistically, adding a Beyond Quarter Pounder, for example, would be a challenge, as new kitchen hardware and procedures would be required. Nonetheless, we are predicting this announcement is made before the year is up. Beyond Meat, despite being a food products company, is actually a member of the Penn New Frontier Fund—a great reminder for investors that innovation can be found in even the most staid, old-school industries.
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KHC
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The Kraft Heinz train wreck continues: company to restate earnings due to misconduct. (06 May 2019) At the risk of being redundant, we hated the Kraft/Heinz merger from the start. Warren Buffett's deal to take Kraft (then symbol KFT) off the market and put it under the control of draconian cost-cutter 3G, a Brazilian company, smelled rotten from the start. Our predictions for the outcome of the deal have played out time and time again since the July, 2015 merger, with the latest iteration coming Monday: Kraft Heinz (KHC $32-$32-65) will restate its financial statements for a two year period due to employee misconduct. It wasn't that the company found the misconduct due to proactive measures; the internal audit took place after the SEC launched an investigation of its own. The nefarious deeds centered around the way in which earnings were calculated during the period in question. When Buffett spawned the merger, the new entity was trading at $72.50 per share. The share price now sits at $32.35—a 55% slide over the course of four years. Yes, it is a challenging environment for the food products industry, but companies like Kraft Heinz and Campbell's Soup (CPB) have compounded the problem by having a dearth of effective leadership. Steer clear of both.
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BYND
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In one of the most interesting IPOs of the year, meat substitute company Beyond Meat will go public this month. (23 Apr 2019) 2019 is shaping up as one of the most exciting years in a decade from the perspective of the IPO market. Furthermore, instead of just a slew of dot-com names, this market has breadth. Case in point: next week a plant-based meat substitute company called Beyond Meat will list on the Nasdaq. In its filing with the SEC, the El Segundo-based company said it plans to price shares between $19 and $21, which would give it an initial value of just over $1 billion. And this company, which will trade under the symbol BYND, is for real. Not only are its products nationwide in stores such as Whole Foods, Safeway, and Natural Grocers, their "meat" can also be found in select burgers at chains including Carl's Jr. and T.G.I. Friday's. Last year the company reported earnings of $88 million and a net loss of $30 million. It will use the proceeds from the offering to increase its R&D, expand manufacturing facilities, and market its meat-alternative products. This company is a leader in a nascent but burgeoning industry. While speculative in nature, it will be worth a look right after the IPO.
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Tuna
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South Korea's StarKist settles with Kroger, other food chains over price-fixing scandal. (15 Mar 2019) Pittsburgh-based, South Korean subsidiary StarKist has reached an agreement with Kroger (KR), Wal-Mart (WMT), Target (TGT), and other grocery store chains after admitting that it conspired with multiple seafood packagers to jack-up the price of canned tuna. California-based Bumblebee Foods LLC had previously plead guilty to the US Department of Justice charges. The most interesting point of this story: who knew StarKist tuna was a subsidiary of South Korea's Dongwon Industries? (It's Charlie® the Tuna, for Pete's sake.) Want to know the two best brands of tuna to buy, based on sustainability, traceability, and other factors? Wild Planet and American Tuna tied for the top spot. Both brands can be purchased from Amazon. The more informed American consumers get about what they are putting in their bodies, the harder it is for companies with questionable products or practices to hide. While we are not saying StarKist or Bumble Bee are unsafe by any means, we are saying that, when it comes to your health, nobody will look out for your best interests better than you. If you question a product, do a little digging.
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KHC
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Kraft Heinz loses one-quarter of its value, and Buffett's Berkshire pays the price. (22 Feb 2019) The deal felt smarmy to us from the beginning. A storied American company, Kraft Heinz (KHC $35-$35-$70), being purchased by a Brazilian company thanks to the help of Berkshire Hathaway's (BRK.B) Warren Buffett. The price? $72.50 per share. At the time, Buffett said "This is my kind of deal." Now, after falling 25% in one morning, KHC sits at $35 per share, and Berkshire earnings are getting cut in half due to the meltdown of the company's largest holding. The loss of one-quarter of its (KHC's) market cap was the result of a slew of bad news being thrown at investors in the earnings release: The company would take a $15.4 billion write-down on its two biggest names, Kraft and Oscar Meyer; the KHC dividend would be slashed by 36%; both revenue and earnings came in well below expectations; oh, and the SEC is investigating the firm for its accounting policies and internal controls. A number of industry analysts cut their ratings on the company after the shockingly-bad report. Pardon us while we shed some crocodile tears for this formerly-great American company, now controlled by Buffett, Berkshire, and Brazil's 3G. It has used questionable tactics to go after rivals, it has allowed 3G to employ their typical "slash and burn" cost-cutting tactics (with employees paying the price), and it is in an industry which consumers are now shunning. Let's see what the "oracle of Omaha" has to say about this mess at the annual Berkshire sycophant-fest this May.
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Hurricane
Florence |
Agriculture is getting pounded from Hurricane Florence. (19 Sep 2018) In addition to its devastating effect on the lives of millions in the region, expect the fallout from Hurricane Florence to include higher poultry prices at the supermarket. It's hard to fathom, but somewhere around 3.4 million chickens and turkeys have been destroyed by the storm, along with nearly 6,000 hogs. Nearly half of all tobacco grown in the US comes from North Carolina, and those crops were devastated, along with fields of sweet potatoes, corn, and cotton. Overall, the best estimate at the aggregate damage caused by the hurricane now sits above the $20 billion mark, with the overwhelming majority of that damage taking place in the Carolinas. Agriculture, insurance, and restaurant firms operating in the region have been most impacted by the hurricane, while mobile generator manufacturing firm Generac Holdings (GNRC $43-$59-$61) is up about 6.5% in the past month.
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CPB
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After management ran Campbell Soup into the ground, a sale is the best option. (30 Aug 2018) We have dogged Campbell Soup's (CPB $33-$40-$51) management—especially CEO Denise Morrison—for years. After 149 years as an entity, all it takes is one bad management team making lousy strategic decisions to end a storied company. Campbell Soup is still alive, but, after getting rid of Morrison, it is time to put itself up for sale. Instead, the company is selling off its international and fresh food lines only, such as Bolthouse Farms, in an effort to raise cash and pay down its massive debt. Campbell has a current market cap of just $12 billion, yet it spent over $6 billion to buy snacks firm Snyder's-Lance in a deal which closed earlier this year. In an interesting twist, activist Dan Loeb of Third Point is teaming up with a relative of founder John P. Dorrance, the "father of condensed soup," in an effort to force a sale. Other family members of the founder, however, are fighting that course of action. While several of them sit on the board (and are the largest shareholders), Loeb will push for ousting the entire board of directors as they come up for reelection later this year. There is no good way out for Campbell other than a full sale; the Dorrance family members should take the money and run.
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CAG
PF |
Conagra to buy Pinnacle Foods for $10.9 billion. (27 Jun 2018) Conagra (CAG $32-$36-$39) is one of those stodgy old consumer defensive stocks which we have never been able to successfully time; in fact, the old "buy and hold" strategy hasn't worked too well either. Case in point: back in 1997, CAG was selling for $25 per share; sixteen years later it hit $25 again—on the way up. Now, the $14 billion packaged food company plans to buy Pinnacle foods (PF $52-$65-$71), owner of the iconic Bird's Eye brand, for $10.9 billion in a cash and stock deal. If Pinnacle shareholders approve the merger, only Nestle would be a larger player in the frozen foods category. This is a low-margin industry undergoing a transformational shift, forcing these types of mergers. Even as the second-largest player post-acquisition, we believe there are much better places to allocate capital within the consumer defensive sector.
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CPB
KHC |
Why beleaguered food products company Campbell's Soup popped nearly 10% on Monday. Every time we excoriate a company for weak management, poor execution, or a lack of vision, we need to start adding the following disclaimer: "If a catalyst comes along to shake things up at this company, it could pop unexpectedly." Typically, that catalyst is a buyout rumor, which is exactly why Campbell's Soup (CPB $33-$42-$54) jumped 9.4% on Monday. The rumor going around is that 3G/Buffet's Kraft Heinz (KHC $54-$63-$90) is considering purchasing the company if (as they expect) Campbell's current strategic review points to a sale as the best option. Before the spike, Campbell's had lost over one-third of its value within the past twelve months. Ironically, Kraft Heinz has had nearly an equally bad year, so maybe the two are made for each other.
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CPB
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After yet another bad quarter, Campbell's CEO abruptly resigns
(18 May 2018) Three months ago we railed against Campbell's Soup (CPB $39-$35-$59) for pushing their political views on consumers instead of focusing on their (declining) business. Now, after watching their share price drop from $68 two years ago to a 52-week low of $35 today (a 49% drop), CEO Denise Morrison has abruptly resigned. Her departure comes on the heels of a less-than-stellar fiscal Q3 earnings report. Revenues for the quarter came in at $2.13 billion, a miss of $10 million, and guidance for the coming year was disappointingly low. This is an excruciating time for the packaged food industry, as consumers continue to migrate to the fresh food "outer aisles" of the store; mediocrity in the C-suites is not an option for the companies within this distressed industry. |
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GIS
BUFF |
Our favorite food products company is about to buy our favorite dog food company
(23 Feb 2018) When Blue Buffalo—our dogs' favorite brand—went public back in the summer of 2015, we were worried. While a private company can make the strategic moves it deems necessary without investors breathing down management's neck, a public company will often make missteps as they focus on what analysts think of their quarterly earnings and outlook. BUFF ($32-$40-$34) came out of the gate strong, shooting up 35% on the IPO. Six months later, they had lost half of their value. While its been a steady climb back since then, the company is about to get a lifeline which immediately jolted them from a $6 billion company to an $8 billion company—they are getting purchased by General Mills (GIS $50-$55-$61). General Mills is one of our favorite holdings in the Penn Global Leaders Club. Dynamic, fearless management, a strong product line, great earnings, and a 3.57% dividend yield. While the company hasn't offered pet foods for some years, it certainly has a great history in the arena—it began selling pet food products in feed stores back in the 1930s. We can't say enough good things about this deal: it will allow GIS to expand into a rapidly growing segment, while giving Blue Buffalo a $31 billion juggernaut to help market and sell its products. We call that win/win. |
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CPB
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Campbell Soup doesn't have the luxury of standing on their political soapbox while sales slide
(16 Feb 2018) Sometimes it appears as though Campbell Soup (CPB $44-$46-$64) is a political organization that just happens to also sell canned and packaged foods. The company would certainly never admit it, nor would a consumer staples analyst write about it, but a publicly-traded company which decides to be politically vocal will pay the price at the hands of consumers—and investors. Not that it was their political leanings that caused today's drop in CPB shares, or a simple continuation of the company's 27.4% one-year decline (versus the S&P's 16% gain). Today's drop had more to do with Campbell's failure to gain traction with its organic expansion strategy, as evidenced by the early-morning earnings release. Even CEO Denise Morrison admitted that "this (Q4) was a disappointing quarter," as US soup sales decreased by 7%, and adjusted gross margin was pounded by inflation and higher supply chain costs. And then there is the company's costly (they overpaid) acquisition of snack firm Snyder's-Lance for nearly $5 billion. Campbell's own market cap is now just $14 billion. One gets the sense that management is simply not focused on the right things. Maybe they should put down the New York Times and pick up an industry publication to figure out how to regain the pole position. |
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HSY
BETR |
Skinny Pop parent Amplify rockets over 70% at open on Hershey acquisition
(18 Dec 2017) You may have never heard of Amplify Snack Brands (BETR $5-$12-$12), but you are probably familiar with their most popular product: Skinny Pop Popcorn. On Friday, Amplify was a $550 million small cap in the food products space. After news came out about Hershey's (HSY $101-$115-$116) planned acquisition of the company, BETR spiked more than 70% and became a $915 million firm. The deal has Hershey paying $12 per share of BETR and taking over the company's debt load. When the dust settles, HSY will be out about $1.6 billion, which they will fund with cash and new debt of its own. We consider HSY fairly (or slightly over) valued at its current price. |
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SMPL
HSY |
Under the Radar: The Simply Good Foods Company
(16 Oct 2017) The Simply Good Foods Company (SMPL $11-$12-$13) is a newly-formed entity created by the merger of Conyers Park Acquisition Corp. and Atkins Nutritionals, Inc. With a market cap of around $850 million, the company had sales of $96.5 million in fiscal Q3, down from $104.6 million in the same quarter of 2016, and a net profit of $4.3 million, versus $776,000 a year ago. While the well-known Atkins nutritional food lineup is currently the company's main source of revenue, SMPL hopes to greatly expand their platform into the broader snacks and healthy foods categories via acquisitions. On 27 August, the company replaced CFO Shaun Mara with vice president of finance Todd Cunfer. The new CFO has 20 years of experience in financial planning and data analysis with the Hershey Company (HSY). |
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K
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Kellogg taps new CEO—can he turn around the floundering albatross?
(28 Sep 2017) It’s not that we are completely down on the packaged food industry. After all, we picked up General Mills (GIS) a few weeks ago in the Penn Global Leaders Club. We are down, however, on poorly-run companies more concerned about appearing politically-correct than running an efficient enterprise. Kellogg (K $62-$63-$78) falls in the latter category. With the company’s shares on a downward trajectory for the past year, now at a 52-week low, we are not the only ones who feel this way. Under pressure, the company finally fired their CEO, John Bryant. Not wasting any time, they announced that former Nature’s Bounty CEO, Steven Cahillane, will take the helm this coming Monday. With shares sitting at a multi-year low, should you buy? After all, the company is so cheap that its $0.54 dividend now equates to a 3.43% yield. We wouldn’t make a move before we see if Cahillane is a real leader, a plain-vanilla manager like JCP’s Marvin Ellison, or a complete fraud like Apple’s former CEO, John Sculley. |
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GIS
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Food giant General Mills strikes back against political correctness
(21 Sep 2017) Organic. Natural. Non-GMO. The list goes on ad nauseam. I mean c’mon, we all want to live a healthy lifestyle, but one more stinking commercial by the politically-motivated organization “The Truth” about cigarette smoking and I am going to consider taking it up! Americans have had enough of being told, continually, how to live their lives. Well, our beloved new CEO of General Mills (GIS), Jeffrey Harmening, is pushing back against this political correctness. (We first wrote of Harmening back in August; see below.) The company’s previous CEO ordered the removal of the artificial ingredients which gave General Mills' product Trix Cereal its vibrant colors, replacing these ingredients with the squeezings from beets and radishes, as well as the spice turmeric. The result? Bland colors. After a general revolt by Trix lovers, the new CEO has ordered a return to the original ingredients. And the dirty little secret? Eating the original Trix won’t hurt you any more than downing the new-age radish-infested stuff. It was all done for show. |
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Trade
Alert |
Trade Alert: Adding consumer defensive name to Global Leaders Club
(21 Sep 2017) While we are not predicting a correction (meaning a 10% to 20% drop in the markets), it is a simple fact that they happen quite regularly—even in the midst of a bull market. The last one occurred in February of 2016 when the indexes fell roughly 14%. We are constantly looking at what is potentially on the horizon, and taking actions based on what we see. With that in mind, we added a consumer defensive name (which everyone would recognize) to the Penn Global Leaders Club on Wednesday. When a correction hits, solid consumer defensives typically withstand the brunt of the storm. Plus, the price was just too good to pass up. Clients and Members can see the name by going to the Private Trading Desk. |
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GIS
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General Mills drops as the processed food maker misses numbers
(20 Sep 2017) Food maker General Mills (GIS $53-$55-$66) is suffering from the same malaise affecting other companies in its peer group: the consumer move away from processed foods and towards a simpler, healthier diet. The company was off about 5% in pre-market trading after reporting another ho-hum quarter. Revenues fell 3.5% in the quarter—to $3.77 billion—from the same quarter last year, and earnings were off 9% from last year. Projections for FY2018 weren’t too rosy, either. The company is expecting organic net sales to fall another 1% to 2%. Here’s our take: all is not as bleak as it sounds. The company’s shares are down about 15% over the past year, but GIS has been acquiring “healthier” names like Cascadian Farms, Nature Valley, and Yoplait yogurt. Sure, they still own our personal favorite, Hamburger Helper, but a few of us old-school fossils are still buying their legacy products. With a 3.5% dividend yield and shares near their one-year low, investors wouldn’t be taking on too much risk by adding the company to their portfolio. |
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POST
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Post Holdings to buy Bob Evans Farms for $1.5 billion
(19 Sep 2017) Post Holdings (POST $69-$86-$89) has announced that it will buy Bob Evans Farms (BOBE $37-$78-$75) for $1.5 billion, or $77 for each outstanding share of BOBE. Bob Evans, which produces and distributes refrigerated side dishes, pork sausage products, and frozen food items, was already up close to 40% YTD (it moved another 6% up after announcement), while Post has been languishing, up just 7% over the same timeframe. This is a clear move by the iconic cereal-maker to pick up more products around the perimeter of the grocery store, where shoppers are increasingly spending more time—and more money. For what it's worth, BOBE divested itself of its restaurant business earlier in the year. |
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MKC
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McCormick announces 40 new breakfast and fall meal products
(14 Sep 2017) The packaged food industry has been under assault on a number of different fronts over the past few years, but McCormick & Co (MKC $89-$98-$107) remains one of our favorite plays in the space. This exceptionally-well-run, $13 billion food products company just announced it will be releasing 40 new products focused around the breakfast table and autumn home cooking. New seasoning mixes with simple recipes on the package include: Mexican egg casserole, apple cinnamon French toast, General Tso’s slow cooker chicken, white cheddar mac & cheese, and many more. Additionally, twenty-four classic McCormick herbs and spices will now be offered in larger sizes. These products will hit the shelves this fall. |
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CPB
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Poorly-run Campbell Soup misses top, bottom, front, back
(31 Aug 2017) We’ve railed against Campbell Soup (CPB $47-$47-$64) for some time, and it has nothing to do with the industry it is in or the plethora of excuses given by management for missing its numbers once again. Rather, it has everything to do with management itself. As for the numbers: Sales came in at $1.68 billion, down from the same quarter last year and under expectations. Net income for the quarter was $318 million—less than expected but at least better than last year’s $81 million loss. CEO Denise Morrison threw out every worn-out excuse in the playbook; all that was missing was a reference to Hurricane Harvey. She will save that one for next quarter’s miss. Management is worthless. They are turning off their traditional customer to chase a flighty generation that has no interest in their products. As long as Morrison is at the helm, steer clear of this soup and biscuit company, despite Thursday’s 7% plunge to a new two-year low. |
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SJM
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JM Smucker drops double-digits on earnings, nearing a buy point
(24 Aug 2017) The J.M. Smucker Company (SJM $107-$107-$144) was dropping through a two-year low share price on Thursday after missing numbers and slashing guidance for 2018. Sales for the consumer foods maker (Smucker’s, Folgers, Crisco, etc.) declined 4%, to $1.7 billion, and profits came in at $1.12 per share versus $1.61 in the same quarter of 2016. Shares of Smucker have fallen 16% YTD versus a 4.6% drop for the overall industry over that timeframe. The consumer staples sector ETF, symbol XLP, is actually positive 5.45% year-to-date. SJM is a fairly well-run company, and if it breaks into a double-digit share price, we will buy. |
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GIS
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General Mills’ new CEO isn’t buying all the new-age, feel-good hype
(16 Aug 2017) Pick up a mainstream newspaper or turn on the financial networks and the message, with respect to food products, is clear: the “middle” of the grocery store is dead. You know, the middle aisles with all those yucky, sugar-coated cereals and boxed food items. Like members of a cult, CEOs invited on these networks nod their head up and down in agreement when these little millennial anchors tell them “what the public wants,” like they know. General Mills’ (GIS $53-$58-$72) new CEO, Jeffrey Harmening isn’t buying it. He said that his company will not turn its back on the likes of Cinnamon Toast Crunch and Lucky Charms. You wouldn’t know it by listening to millennial reporters on the business networks, but the dirty little secret is that sales of these classic American products have been on the rise. Our hats off to General Mills. From an investment standpoint, at $58 per share and with a P/E of 20, we consider the company undervalued. OH, and we also approve of the company's new Yoplait Oui yogurt ads featuring "The French Girl." |
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DANOY
KO KHC |
(14 Aug 2017) In interesting twist, could France's Danone be acquired by an American firm?
This past April we reported on France’s Danone SA (DANOY $12-$16-$16), maker of Danon yogurt and other dairy/food products, purchase of White Wave Foods, and ruminated over the inability of US companies to buy their French counterparts. It’s still in the rumor stage, but it appears that Danone, itself, may be the target of an acquisition by the likes of Kraft Heinz (KHC) or Coca-Cola (KO). Sadly, thanks to Warren Buffett’s infusion of cash into Brazil’s 3G Capital to purchase Heinz and Kraft, KHC is really not an American company any longer (3g/BRK own just over half of the company). As for Danone, it was trading up about 3% on the news. We are rooting for a KO takeover, which would be a good fit considering Danone's bottled water business. |
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MKC
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(19 Jul 2017) McCormick & Co. to buy French's mustard maker RB Foods for $4.2 billion
One of our favorite food products companies (and one Buffett has kept his dirty mitts off of), McCormick & Co. (MKC), has announced that it will buy the food division of Reckitt Benckiser Group (RBGLY), the British parent of French's mustard, for $4.2 billion. RB Foods' other brands include Frank's RedHot sauce and Cattlemen's barbecue sauce. Our only concern is the price—RB was valued at somewhere between $2.5 billion and $4 billion leading up to the deal. The food products industry has been undergoing a major consolidation over the past few years, as margins continue to get squeezed. MKC has a market cap of $12 billion and is currently trading for $97 per share. |
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SJM
CAG |
(30 May 2017) Smucker to acquire Wesson from Conagra. Consumer food company J.M. Smucker (SJM $122-$128-$157) has announced an agreement to buy the Wesson oil brand from Conagra (CAG $33-$38-$42) for $285 million. The deal, which will be funded by SJM taking on new debt, is subject to regulatory approval. While Smucker's stock has flatlined over the past year, Conagra is up about 13% over the same timeframe. Both companies have nearly an identical dividend yield of around 2.4%, and both have P/Es in the mid-20s. Additionally, neither are likely to find their way into the Penn trading platform anytime soon. This is an industry in serious flux, thanks primarily to the "outer aisle" organic movement. (Photo: Wesson oil was developed by chemist David Wesson in 1899)
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DANOY
WWAV |
(05 Apr 2017) France's Danone to acquire WhiteWave Foods. Too bad it isn't this easy for an American company to take over a French company. Following an agreement to divest itself of Stonyfield Farms, Danone (DANOY $12-$14-$16) has received the blessing of the US Department of Justice for its $12.5 billion acquisition of Colorado-based WhiteWave Foods (think of the Silk® line of plant-based "milks"). Paris-based Danone, maker of the eponymous yogurt, had roughly $24 billion in sales last year, compared to $4 billion for WhiteWave (WWAV $38-$56-$57). The Stonyfield divestiture was required to assure farmers in the Northeastern US didn't suffer due to the percentage of the organic milk business the combined company would have controlled in the region.
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CALM
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(27 Mar 2017) Shares of egg giant Cal-Maine drop sharply, regain footing. Penn members and clients should be familiar with Cal-Maine Foods, Inc. (CALM $35-$37-$55), as the country's largest egg producer and distributor has been a component of the Strategic Income Portfolio on several occasions (thanks to its 6% dividend). The $2 billion small-cap value company briefly dropped nearly 7% Monday morning before regaining its footing and turning positive—an excellent show of resilience. The reason for the brief drop? Earnings came in at $306.5 million for Q4, a bit shy of expectations for $325 million. Cal-Maine CEO Dolph Baker (what a great name for an egg company chief) said lower market prices and weaker demand trends were the cause of the miss. You might be familiar with the company's Eggland's Best brand.
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TSN
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(06 Mar 2017) Tyson shares down on bird flu concerns. Avian influenza, aka "bird flu," found at a Tennessee chicken farm which supplies Tyson Foods (TSN $56-$61-$64) has forced a flock of nearly 75,000 birds to be destroyed. After dealing with a 2015 bout of bird flu, which cost the industry nearly $400 million, stricter detection mechanisms were put in place to avoid a repeat. Because of these measures, agriculture officials were alerted quickly when higher-than-normal death rates were reported at the supplier farm. TSN is down about 4% on the news, but we wouldn't buy the food processor unless it were sitting at around $45 per share.
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