Earnings season is on like the break of dawn for one key sector: packaged food companies
All in all, big names such as PepsiCo (PEP) and General Mills (GIS) have reported solid quarters considering several factors. The first is intense pressure on sales from currency translation. Let's all hope the dollar stops its flight-to-safety-fueled ascent from June so these multinationals show some better sales later in the year. The second is a host of shifts in what the consumer is buying -- in are high-calorie, natural-sweetened sodas, out are cereals already sporting lower sugar and carb counts. So hard to keep track of where the consumer is mentally on food -- one minute they are lusting for an organic Chipotle (CMG) burrito, the next it's OK to consume hundreds of calories on a new Shake Shack (SHAK) fried chicken sandwich.
Having sat down with General Mills CEO Ken Powell last week and PepsiCo CFO Hugh Johnston on Thursday, a few themes are emerging in the packaged food space. I reiterate that you need to be cautious on names such as Campbell Soup (CPB) and Kellogg's (K). These are two companies with overexposure to the "center aisles" of supermarkets, which are very slow in terms of sales. Specific to Campbell Soup, it will have a strategic update later this month, and I suspect the news won't be pretty (could include write-offs or the exploration of business separations).
Asset write-downs: Midway through the year, I think packaged food companies are poised to make further adjustments to the valuations on lagging businesses. Think items available in the frozen food categories or pancake syrup. When you see a company do this (look at the goodwill and PP&E lines on the balance sheet) it's your job to find out what business got marked down. Call up the damn company, take matters into your own hands -- you are part owner. Between now and the end of the year, many underperforming assets are likely to be moved as their values have been written down, and execs want to start 2016 on a fresh note. I believe foreign buyers, with their focus on operational discipline, are poised to make a grab at household food brands.
Pricing: Very impressed by the pricing power on some products for General Mills and PepsiCo, items such as Mountain Dew or Yoplait yogurt. I don't think what I am seeing are early signs of Fed-driven inflation, but it bears watching if more packaged food companies have success this year on raising prices. The results from General Mills and PepsiCo are the benchmarks for how others in the sector should be doing on pricing power. If they report falling revenue due to pressured product pricing, it's a major red flag.
Layoffs: Packaged food companies have several major investments occurring right now. One is in stepped-up marketing to drive interest of products featuring enhanced ingredients and sleeker packaging. Another area of focus is reformulating huge product lines to cater to more health-conscious folks. This type of work is not easy, and it's very time-consuming. Finally, there is a heated race to develop the next fun snack or drink, more so than in yesteryear, I believe. We're seeing nice new products from PepsiCo's snacks division and General Mills in yogurt -- new products are the lifeblood of sales for the sector. Over the next five years, I think the entire sector is at risk of shedding more jobs, perhaps a good bit, in order to invest in the aforementioned areas around the globe. Dare I say that trimming the workforce is one requirement in selecting which packaged food companies to buy and hold for the long term.
As for which packaged food giant to own, outside of organic players like Hain (HAIN), it's PepsiCo. I like that it doesn't have a great deal of exposure to the unloved center of supermarket aisles. The company's innovation engine is firing on all cylinders. And I believe the company's diet cola business could get a boost into year's end as non-aspartame-sweetened cans rotate onto store shelves.