Food Stocks To Watch In 2012

By Ryan C. Fuhrmann | December 27, 2011 AAA

Most years, the food business is mundane as they come. Lately though, most firms in the industry have been buffeted by rising food costs and have had to take corrective action to protect their profits. The maturity of the industry in general has also meant that growth avenues are difficult to find, and this has resulted in a bit of corporate engineering from several players. This includes pursuing merger and spinoff activity to boost slower organic growth trends. Below is a brief overview of some of the more interesting food stocks to watch in the coming year, and how they plan to boost shareholder returns for 2012 and beyond.

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Diamond Foods
Diamond Foods (Nasdaq:DMND) has hogged the headlines in the food industry over the past few months. Back in October, it entered into an agreement to obtain the Pringles chip operations from industry giant Procter & Gamble (NYSE:PG), in exchange for P&G obtaining a significant equity stake in Diamond Foods. The complicated deal has much to do with saving on taxes, but it may have hit a snag when the SEC announced it was investigating potentially fraudulent activity in the manner in which Diamond paid its walnut suppliers. The allegations focus on whether Diamond held back on booking costs, related to buying walnuts, to boost its margins and obtain better terms for the Pringles transaction. At some point in 2012, investors will find out if the deal ends up going through and whether accounting irregularities did indeed take place.

Kraft
Food giant Kraft (NYSE:KFT) bills itself as the second-largest food company in the world. That ranking will end in 2012, because back in August Kraft announced its intent to break itself into two separate companies. The first is intended to be a "high-growth global snacks company", and the other is set to operate as a "high-margin North American grocery business". The estimated revenue breakdown will be $32 billion and $16 billion, respectively, and is intended to unlock value for shareholders as well as separate the firm to allow it to better cater to growth and income investors. The current dividend yield for Kraft is 3.2%.

H.J. Heinz
With a current dividend yield of 3.6%, H.J. Heinz (NYSE:HNZ) has among the highest payout rates in the food industry. Due in good part to the efforts of activist shareholder Nelson Peltz, the company has managed to cut costs and leverage 4.4% annual sales growth into annual profit growth above 10% over the past five years. Sales growth is projected to perk up to near 9% for all of 2011, which would qualify Heinz as one of the fastest growers in the industry, but then that growth could moderate back to about 4% in 2012. Commodity cost inflation could continue to pressure margins, but analysts currently project earnings north of $3.62 per share by the end of 2012 for a forward P/E of just below 15. (To know more about EPS, read How To Evaluate The Quality Of EPS.)

Lancaster Colony
Specialty food producer Lancaster Colony (Nasdaq:LANC) has a current market capitalization below $2 billion. This qualifies as small cap and has meant that the company doesn't have the geographic or product diversity (it also sells cyclically sensitive candles and glassware) to deal with tighter domestic consumer spending and higher commodity costs. As a result, analysts project only low-single-digit sales growth over the next couple of years, and profits could end up falling again for all of 2011. This would mark the third straight year of profit declines, though analysts expect a recovery back above $4 per share for 2012.

Bottom Line
Heinz and Lancaster offer stability as they intend to grow via organic means, while Kraft offers an interesting opportunity to profit from the split of its slow-growing domestic operations from the faster-growing ones. Most investors may want to watch the drama out of Diamond Foods from the sidelines, though any positive developments could send the shares up sharply. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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