NEW YORK (
iPath Dow Jones - UBS Commodity Index
has jumped 17% over the last six months, and this speedy ascent has investors pondering the impact on food companies.
When prices jumped in 2008, several food companies just passed along the increases to customers. The recession was just in its preliminary stages back then, so the higher prices were more easily accepted by consumers. Now, however, with unemployment continuing to hover near 10%, those same consumers may hesitate to pay up for their favorite brand.
Food companies have already suggested they may wait two quarters before passing on the increases, which will cause margin compression in the meantime. Major companies have already missed earnings, and some have lowered guidance. Credit Suisse analyst Robert Moskow reviewed several food companies and their sensitivity to commodity inflation and found some names were better equipped to deal with the cost increases than others.
Moskow believes that
has the best opportunity to weather commodity inflation because of volume growth and pricing.
The company did warn that ingredient costs will be higher for 2011, though, as sugar prices have risen because of weather-related production problems in Brazil. However, India has had a great growing season, and now sugar prices may drop again as this new player enters the market.
. Hershey's gross profit margin increased in the third quarter of 2010 from the year before, and the company also grew its sales and net income during the past quarter when compared with the previous year. Net income outpaced the industry average.
notes that Hershey trades at a significant discount to its peers on a price-to-earnings basis. Hershey's has two new products coming in December: Hershey's Drops and Reese's Mini's
gets an Outperform rating from Moskow. He thinks the stock is unloved and that any bad news is already baked into its share price.
The company recently noted it has lifted pricing on 40% of its portfolio in Europe and that it expects to boost pricing in its Nabisco category as well. While its competitors haven't raised prices yet, Kraft believes they will soon follow. Kraft has positioned itself well in
, even though it lost its
Institutional investors are underweight the stock, and shares trade at a 5% discount to the food group.
as well, citing the trading discount.
has already raised prices in meat and beverage and it did not see any volume declines.
Spot inflation for the company's ingredients is up 21%, when just three months ago it was up 15%. In the last quarter, commodity inflation cost the company $90 million, but that was partially offset by $28 million in pricing increases. Moskow raised his 12-month price target on the stock to $17 in November, even though he maintains a neutral rating.
, noting that Sara Lee is expected to have an earnings growth rate that significantly exceeds its peers.
On a price-to-sales ratio basis, the stock is trading at a discount to the industry. Looking ahead, there are signs the company make make a run at adding a coffee brand to its portfolio, such as Maxwell House or possible a Brazilian name.
expects tomato and potato costs to become more favorable in quarters to come. This should offset the higher prices for packaging and sugar.
The company reported a 5% increase in the first quarter for dairy costs but managed to offset that through contract pricing. Heinz says it dealt with 3% inflation for 2010, but only expects inflation of 0%-1% for 2011.
Moskow writes: "Heinz has limited exposure to commodity inflation and currency." He also noted that October vegetables had the sharpest PPI deflation of the food group.
, noting that its current price-to-earnings ratio indicates a discount to the food products industry. Argus Research analyst Erin Smith also believes the stock is undervalued and has a 12-month price target of $55 and a buy rating on the shares.
looks to be in the worst position to pass through price increases as its categories are among the most competitive in the industry.
Moskow expects a shock to ConAgra's volume sales when they push through the higher prices, a similar situation that occurred in 2008. The company is already hedged by about 40% on its 2011 commodity calendar, so Moskow isn't too worried about 2011, but he is concerned about the beginning of fiscal year 2012.
He thinks investors should stay away from ConAgra, saying it will be "extremely challenging to improve margins amid current conditions."
warns that sales and net income are underperforming its competitors and says ConAgra's earnings growth rate will significantly trail those of its peers.
--Written by Debra Borchardt in New York.
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