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Branded Food Sector Growth Rate Virtually Zero

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Not only has there been a general slowdown of growth in the sector, but even M&A activity has been far from a quick fix.

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The discounted earning growth rates in branded food stock valuations have been going down for about the last 20 years. Many are now between negative 2% growth and positive 2%, including ConAgra (CAG), Campbell Soup (CPB), General Mills (GIS), Kraft (KFT), Kimberly-Clark (KMB), Newell Rubbermaid (NWL), Procter & Gamble (PG), JM Smucker (SJM), and Molson Coors (TAP). Leaving aside whether these implied growth rates are justified (I think they are for maybe half of these companies), there are other things to watch out for if you hold or are considering holding these stocks.

The first thing is to take sell-side analyst predictions of growth rates with more than the usual skepticism. I just saw one analyst compose a relatively long report to examine the growth rate algorithms of a number of these companies. The result was a long-term growth estimate for earnings per share that came down from 7-9% to 6-9%. There was talk of the pressure that these companies are under from private label and a falling demand in developed countries, but the dynamics and scenarios that kept these companies in the analyst's positive territory were never explained. There is always the dynamic of a sell-side analyst not wanting to lead or sometimes even move down with the market in analyzing a bad news situation. But I believe that it gets especially touchy when the (real) resulting numbers get near zero or become negative.

The second thing is to consider that a general slowdown of growth in the category has led to various mergers and acquisitions and those, in turn, have not had such a good effect. There is the risk that these actions are not just dilutive in the short run, but anti-shareholder from a discounted-returns-adjusted-for-risk perspective.

Kraft's Cadbury acquisition was expensive and, while the jury is still out on it, the company is splitting itself in two for no really valid strategic or investment reason.

For a long time, ConAgra has been looking strategically for branded food earnings as a percentage of its total earnings. But it recently wanted to buy Ralcorp (RAH), which is, more than anything else, a private label food producer.

Molson Coors, with an essentially negative growth rate as wine and spirits growth has accelerated, bought StarBev, a Czech brewer. What on earth would make beer a growth product in central Europe?

Kellogg (K) just bought Pringles, which will require some work to be done in order to integrate it with its other Keebler snack offering.

So, realistically, I would probably assign more risk to companies with near zero growth rate, either expected or implied, unless there is an internal or turn-around situation that could bring the growth rate back up, such as in Procter & Gamble's case, for instance.
Position in PG
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