InvestorPlace Blogs is powered by Marketocracy. Marketocracy has authorized Investor Place Blogs as an official registrar for voting through Marketocracy's Investment Research Rating service. Registered members of InvestorPlace Blogs are linked with a Marketocracy account to establish voting power based on their performance of trading and posting on stocks.
After the recent non-traditional defensive pick, I wanted to look at a more traditional defensive play involving commodities trading -- food stocks.
Last week, General Mills (GIS) issued a press release raising guidance for their 4th quarter and full FY08 earnings and providing guidance for FY09. Excluding some mark-to-market gains on commodities options, GIS expects earnings of $3.52 a share for FY08 when they report this week. The company expects to earn between $3.78 and $3.83 for FY09 excluding any one-time adjustments.
At the 19 June close of $62.79, that puts GIS at a ttm PE of 17.8 excluding items and a fwd PE of between 16.6 and 16.4 on the '09 guidance. The mid-point of the guidance would be 8.1% earnings growth over this year and according to Yahoo analysts expect a 5-year earnings growth rate of 8.7%. GIS pays a quarterly dividend of 40 cents a share for a yield of a little over 2.5%.
When compared to some of their competitors, General Mills looks a little pricey at over 16 times next year's earnings. HJ Heinz (HNZ) has a slightly higher 5-yr growth estimate, but sells at 15.6 times estimated '09 earnings. Conagra (CAG) has a slightly lower 5-yr growth estimate of 8.2%, but sells at a much lower fwd PE of 13.8. Kellogg (K) has nearly the same predicted growth rate as GIS, but sells at a slight discount based of forward earnings.
For any food company, an investor needs to be very concerned about rising commodity prices. JM Smucker (SJM) reported higher yoy revenues last Thursday, but disappointing earnings because of high input prices. The stock shed over 8% on the day. With ethanol mandates increasing demand for corn and tragic flooding in the mid-west, it's hard to be bullish on any company that has grain as one of their main raw material inputs.
I didn't find any information on how much GIS has hedged their commodity cost exposure, but they must have some futures or options since they reported gains in their press release. Anyone who's spent any time in a supermarket lately can testify that food companies are passing along at least some of their costs; however, at least in Smucker's case it wasn't enough to offset rising commodity prices.
Based on this quick look, HJ Heinz looks like the best bargain in the group with Conagra a close second. None of these stocks are going to take off on a tear, but they're not likely to see a lot of downside either - defense. All of the names mentioned pay a decent dividend, so you get paid while riding the market out. General Mills' dividend and strong brands should provide some downside protection, but the stock would have to drop about 5% to be comparable to HNZ.
Comments welcome, especially if you can explain why GIS deserves a premium to HNZ.
| 
RSS 2.0
