Editor's note: This column was submitted by Stockpickr member Winston Kotzan.
Looking for a safe investment haven from the subprime-mortgage shockwave? One area that's safe from the fallout and primed for accelerating growth is the food industry.
Major food conglomerates have recently been reinventing themselves with a more health-conscious image and expanding into emerging markets. I consider two of the best to be
( KFT) and
, both of which are going through a series of managerial changes for the better.
Recently freed from control of tobacco giant
, Kraft's CEO Irene Rosenfeld has vowed to revitalize the company's growth by cost-cutting and rewiring the company's culture to foster a better risk-taking environment. It seems that one of the opening moves of this new strategy is its proposed $7.2 billion purchase earlier this month of
cookie and biscuit unit, an acquisition that would make Kraft the world's leading cookie manufacturer.
According to Sanford C. Bernstein & Co. research, the Danone transaction should result in $200 million in cost savings. It would also deliver access to better markets, as Danone's segment is growing at 4.2% annually with 27% international exposure, compared with 3.5% growth and 13% international exposure for Kraft's current reach.
The best news is that Kraft will have plenty of help in its restructuring, as three of the most successful shareholder activists have taken positions. Nelson Peltz, a self-made billionaire in the food and restaurant sector, recently declared a 3% stake. Peltz is known for building shareholder value in companies by influencing management through his stock positions, and he is rumored to have involvement in the Danone acquisition. To see all of his holdings, check out the
portfolio on Stockpickr.
has also taken an undisclosed stake, and
has accumulated a position representing less than 5%.
It is also interesting to note that some of Buffett's management teams have had previous stints at Kraft. One of these connections is Marla Gottschalk, who previously spent 10 years at Kraft and is now the CEO of Pampered Chef, a company owned by Buffett's
. Perhaps the experience and knowledge brought by these Kraft veterans to Berkshire will help Buffett form a strategic plan for Kraft.
Another plus for Kraft: Its $5 billion stock buyback plan and solid 3% dividend should keep it afloat through any broad market decline.
Nestle's New Image
Nestle is another snack giant with a new catalyst for growth. Despite being the largest in the industry on the basis of revenue, it has lowest profit margins. Past acquisition sprees have just left it with too much fat. According to
The Wall Street Journal
, 30% of its 130,000 brands are unprofitable. CEO Peter Brabeck has aggressively begun cutting down inefficiencies, such as eliminating some of its 1,200 subsidiaries.
Nestle is also remarketing itself as a "health and wellness" company in attempt to toss its junk-food connotations. Some acquisitions associated with this new image include Jenny Craig dieting products as well as both the Gerber baby foods brand and hospital nutrition division from
. Some of these new businesses offer better profitability than Nestle's core portfolio. For example, the hospital nutrition market offers a 7% growth rate, compared with the 1%-2% growth for other food markets.
In addition, Nestle has a strong balance sheet to drive future acquisitions and expansion. Low debt and liquid investments such as a 75% stake in eye-care company
( ACL) and a 29% stake in
give it many options for acquiring cash or forming strategic plans in new markets.
One prospect keeping the long-term growth alive is that both Kraft and Nestle have built a significant presence in China. With over a billion consumers in China, both of these companies have been early birds to this market.
Of Nestle's total revenue, 2.5% comes from China with double-digit growth. Kraft has also established itself in China as the No. 1 player in powdered beverages and biscuits, and No. 2 in coffee with its Maxwell House brand.
If we face an economic slowdown in the U.S. (or worse, globally), consumer staples such as these should rally as money flows out of the riskier plays to these solid dividend-yielding cash cows. However, even without such a recessionary-mode shift, significant managerial and strategy changes should propel these food titans to higher growth.
At time of publication, Kotzan was long Kraft, although positions may change at any time.
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