Food Stocks: 'Emerging' Opportunities?

NEW YORK (TheStreet) -- Food stocks from Kraft (KFT) and Nestle (NSRGY) to Wendy's (WEN) and McDonald's (MCD) are banking on emerging-market strength, but that doesn't mean the group is immune to market volatility. For equity investors, these companies could prove to be the outperformers.

Kraft

With consumer spending in the U.S. still relatively tight, it's no wonder that major multinationals are looking overseas for growth. Taco Bell and KFC operator Yum! Brands ( YUM) grew restaurant sales by 18% in China last quarter, even as domestic sales fell 4%, and the company made clear that mainland China is its "number one market for new company restaurant development worldwide."

The trend could indicate that these companies would appear relatively safer to equity investors amid the market volatility in recent weeks, but the group "still has such exposure to the U.S. that they are not getting looked at as a place to hide," Oppenheimer analyst Brian Bittner told TheStreet.

Big restaurant names like McDonald's and Domino's ( DPZ) have held up extraordinarily well, outperforming their peers on a relative basis, Bittner said, but not well enough to withstand the 400- and 500-point market swings of recent sessions. The business models of McDonald's and Domino's are more defensive and less correlated to macro headwinds, and these names are more likely to do well even if a double-dip recession begins, he added, while more discretionary-type names in the food-related sector would be the first for consumers to cut out of their budgets. Tupperware ( TUP), which attributed its recent profit beat to growth in emerging markets, could be an example of that.

Still, Bittner was cautious to make too much of any generalizations in the current volatile environment. "In this market, I don't know if any of the stock market activity has anything to do with business fundamentals. It's unlike anything we've ever seen, with fundamentals being thrown out the door. The real question now is, are you in equities or are you not, rather than which equities are you in."

Opportunities do exist, however, particularly as discretionary names like Brinker International ( EAT) -- a casual dining-chain operator that reported earnings since the selloff began -- said it saw no directional trend in restaurant traffic in the last two weeks. This indicates that widespread concern of a huge consumer meltdown, at least in the near term, is hard to find, Bittner said.

Growth in overseas markets is therefore "an important attribute" for any equity, "but right now the main focus will continue to be on the homeland U.S. market," Bittner went on. Emerging-market growth mattered more three weeks ago than it does right now when the more important metric is determining which companies will outperform domestically.

"If international operations work but a domestic turnaround doesn't happen, the stock fails," Bittner said, naming Wendy's as a prime example. "Investors must be very aware of the domestic side of operations before investing in a particular equity because of the dislocation of what people are expecting. Figure that out first before putting your marbles all in international attributes."

-- Written by Miriam Marcus Reimer in New York

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