Food Plays That Look Savory

By Investopedia Staff | April 24, 2012 AAA

Food stocks generally lack a sensational story and sex appeal, so they don't always draw a substantial amount of attention from the investment community. However, the earnings that some of the big names have been putting out are eye-catching and many investors believe that the space has a lot of upside potential in 2012 and for many years beyond that. That being said, let's dig into the Heinz (NYSE:HNZ) story a little deeper.

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Heinz Looks Ripe
Let's think about where we are right now. The domestic economy is showing some signs of life and many are more willing to spend their hard earned money on a variety of goods which seemed unnecessary a year ago. At the same time, the stock and real estate investors are more anxious than they once were, so most people are reluctant to lay out large sums of money to purchase higher end or bigger ticket items. This means that people will continue to eat at home, which should play right into Heinz's hands.

Of course Heinz has done pretty well despite the languishing economy. In fact, the company known around the world for its popular ketchup has exceeded Wall Street estimates in three of the last four quarters, justifying the shares' trading range in very close proximity to its record high. If it is able to continue to positively surprise analysts as the demand for its products grows, more new highs may be just around the corner. Currently, Wall Street estimates that the Pittsburgh based company will earn 79 cents a share in the upcoming quarter.

SEE: Earnings Forecasts: A Primer

Given the recent strength in the markets, money managers are likely to be very careful in their stock selection process. They will hone in on companies that are publicly traded and turning in consistently better-than-expected bottom line EPS numbers. If Heinz does continue to perform, it could end up on the radar screen of more than few institutional players, especially given its low risk levels.

Finally, the company continues to serve up a tasty dividend with a yield greater than 3.5 percent. In this market that's attractive and something that shouldn't be so readily overlooked. While dividends are not generally the sole reason one should get involved in a company or stock, it can certainly sweeten the story. In Heinz's case, it does do that.

Other Players That Look Savory
Kraft (NYSE:KFT), world-renowned for its macaroni and cheese as well as a number of other high-profile foods, is performing well and worth a double take. Kraft trades at a forward P/E of 13.7, and has beaten analyst forecasts in three of the last four quarters.

Campbell's Soup (NYSE:CPB) is another intriguing company. With individuals likely to pack their lunch as they head to school or work, its soup sales can do very well. It trades at forward P/E around 13.3 and is estimated to grow 3.6 percent per year for the next 5 years. Finally, General Mills (NYSE:GIS) is expected to earn $2.54 this year and should be positively impacted by the same macro factors as Heinz. It is also expected to grow more than 7 percent per annum in the next five years.

The Bottom Line
Food companies have excellent potential over the next year or two as Americans remain frugal and close to home. Heinz looks among the most tasty. Its been beating Wall Street expectations and looks like it can do that again. If it does, institutional players are likely to pay close attention.

SEE: The Big Mac Index: Food For Thought

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