Kraft & Tyson Paint Mixed Picture For Food Producers
Posted on: July 28, 2008 - Email Article - Printable Version
Today is a big day for the food producing sub-sector of Consumer Staples as some of the largest players in the market came out with earnings this morning. Kraft [KFT: 29.70, +0.01 (+0.03%)], Tyson Foods [TSN: 17.70, +0.04 (+0.23%)] and WM Wrigley Jr. Co [WWY: 0.00, N/A (N/A)], all released quarterly earnings today, which pointed to a mixed outlook for food producers in general, but also showed that it depends what type of food companies produce that will determine whether they are hurt by the downturn. Let’s take a look at the numbers.
Kraft
Kraft reported earnings of $0.58 per share excluding one time items, which was above analysts estimates of $0.50 per share. Sales rose 21% to $11.2 billion, but cost of goods sold also increased 20% for the quarter, due to rising commodity costs. Higher prices on their products and a $0.06 per share gain on commodity hedging, helped to offset the higher input costs and drive earnings higher for the quarter. The company also raised full year guidance to $1.92 per share above analysts expectations of $1.90. The way I look at it, consumers starting to get squeezed on their income decided to eat out less at restaurants and instead buy more inferior goods (goods for when income decreases), which is what Kraft mainly produces. Consumers chose this alternative as opposed to normal goods (goods for when income increases). With the rate of unemployment likely to increase in the coming months, I see no reason why this trend should not continue and companies like Kraft should be able to benefit. That being said, there is no guarantee that they will able to gain on currency hedges in the future. Mismanagement of price increases and unexpected rises in commodity costs could hurt the bottom line, but for now management seems to have a pretty good grasp on the situation. This should propel Kraft for the next few months.
Tyson Foods
Tyson Foods Inc. on the other hand painted a much bleaker picture as the company could not handle rising grain costs, which decimated third quarter profit by 90%. Tyson posted a $0.03 EPS number for the third quarter on $6.85 billion in sales, which was a 3.5% increase in sales. The world’s largest meat producer noted that the chicken business is currently facing a very difficult market and that they see a turnaround in this business beginning in 2009. Since the chicken business accounts for about a third of Tyson’s revenue, this should have a significant impact on their bottom line going forward in 2008. The company also said they would be rasing prices over the next several quarters to help offset the higher cost of grains, which could have a negative impact on demand as consumers are already scraping the bottom of their income barrels after the fallout of the housing and credit markets earlier this year.
WM Wrigley Jr. Co
Wrigley’s earnings came in at $0.74 per share this morning ahead of analysts expectations of $0.68 per share, due to higher prices and strong international growth in China and Russia. With the EU approval of the Mars and Wrigley transaction, the closing of the deal could come within 6 months according to the company. That being said, there is very little upside potential as Wrigley is already very close to the buyout price of $80 a share. This would mean about a 1% gain from current prices, which is nothing to write home about especially in these market conditions where inflation has taken off due to higher food and energy prices.
In this environment, I personally would not start a position in any of the food producers, due to the high volatilty of commodities. With the floods in the midwest hurting grain and corn supply, management of these companies will need to be careful to balance the effects of the rising costs and the impact of rising prices on demand. While I believe the inflation problem is not as bad as people make it out to be, it is still the worst for food producers and the oil refiners, as these are the areas that have been hit the hardest by the inflation bug. The larger and more diversified food producers will perform better during these times, but I would caution any significant investment into this sub-sector at this time.
-Vinay Ayala
Disclosure: The author has no positions in the above mentioned stocks
The Following Stocks Were Mentioned In This Article: KFT, TSN, WWY
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