Milling & Baking News - January 3, 2017 - 22

Stock Market Analysis X

Kellogg Co., Mr. Baumgartner said.
The company's value-priced position gives it an advantage, an edge
enhanced by the acquisition of MOM
Brands a couple years ago.
"They are beginning to put advertising behind MOM," he said. "MOM is
under distributed. It is a regional business they are taking national. It has
pretty high customer loyalty but pretty low brand awareness. That's a good
distribution opportunity. They have
begun addressing that in a small way."
For Inventure Foods, Inc., Phoenix,
2017 will be a "binary event year," Mr.
Pinheiro said. The company is in the
midst of a strategic review, and as of
late 2016, there has been no end result,
he said.
"We suspect they are looking at value
of this company as a potential acquisition," he said. "The company is in a
bind. After the recall in 2015 in their
fresh frozen business, the company
had a huge setback. Now they are fairly
highly leveraged. They aren't in position to meet EBITDA covenants. They
could sell a business or brand to reduce
debt. They could stay within covenants,
but that constrains ability to grow, a
growth inhibitor. They also could either
raise equity, which would be okay here,
or sell the entire business."
Choosing to ride out the storm and
meet EBITDA covenants will not take
Inventure where it needs to go, Mr.
Pinheiro said.
"That would leave them in a very
slow growth mode," he said. "I don't
think that's the right strategic path for
this particular business. I think the
board will find selling the business
is in the best interest of shareholders.
I think it's worth more than $12 per
share. If it doesn't get sold, the stock
has some downside."
With prospects for packaged foods

companies questionable in the new
year, Mr. Hundley said he generally
prefers food ingredient companies.
"The market for ingredient companies is growing and growing well," he
said. "We expect ingredient segment
revenue growth of 4% to 8% on average ahead."
Additionally, ingredient companies

'With General Mills, the
cost saving and profit
expansion opportunity
is just as good as at
Kellogg, if not better.'
- John J. Baumgartner
Wells Fargo
are generating higher operating margins - 15% to 20% or even higher, he
said.
"We think the ingredients industry
is really packaged foods circa 2000 or
2005," Mr. Hundley said. "Ingredients
globally are very fragmented and very
fragmented in the United States. We see
a lot of consolidation potential ahead."
Among his favorite investment targets in the ingredient space are Sensient Technologies Corp., Milwaukee,
and International Flavors & Fragrances, Inc., New York.
"Those two names should benefit
from what they call natural conversion - the switch from synthetic to
natural ingredients," he said. "They
really stand to benefit."
Among food companies, foundational ingredients also may affect the
fortunes of investors, Mr. Hundley
said. For example, sugar is "squarely
in the sight lines" of regulators and activists, he said.
"We think sugar reduction will be

Grain-based foods share price charts
Starbucks Corp.

TreeHouse Foods

per share

$65

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$110
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2016

$100

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$90
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$45
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$35
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$70
July

22 / January 3, 2017 XMilling & Baking News

Sept.

Nov.

2015
$60
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July

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another focus for 2017," Mr. Hundley
said. "As far as grains go, our view is
that we've seen the worst in no- or lowcarb trade. I'm increasingly hopeful
consumers are becoming better educated and are reengaging with grains."
For the most part, the analysts were
not enthusiastic about the large c.p.g.
companies. Commenting on a few of
them, Mr. Baumgartner said Mondelez
International, Inc. has performed fairly well even though the growth rate
of global snacking has decelerated to
2% to 3% annually from 4% to 6% a
few years ago. Still, he said Deerfield,
Ill.-based Mondelez is able to generate
its "own growth" by expanding into
colossal markets such as China and
India, where the company's footprint
remains modest.
Similarly, the Kraft Heinz Co., Pittsburgh, has "performed better than we
feared out of the gate."
"The challenge is expectations are
very high," Mr. Baumgartner said.
"They have been very aggressive cutting costs. That's embedded into the
price. There are questions about what
they may buy next. People are in the
name for that. The stock isn't cheap.
It's pretty expensive."
Among the largest ready-to-eat cereal companies, Mr. Baumgartner said
the long-term outlook for General
Mills, Inc., Minneapolis, is brighter
than that of The Kellogg Co., Battle
Creek, Mich.
"With General Mills, the cost savings and profit expansion opportunity is just as good as at Kellogg, if not
better," he said. "At General Mills,
we are more positive on their sales
growth potential, especially global.
They're in categories that are growing and in markets like China with
brands that are well appreciated.
Short term, they're both struggling.
Neither one is very appealing at the
moment."
Lack of core portfolio growth has
forced Campbell Soup Co., Camden,
N.J., to reach beyond its core categories, Mr. Baumgartner said.
"Bolthouse (Farms) was a big one
and isn't panning out," he said.
The company is facing pressure
and investor frustration, he said.
Pepperidge has been a bright spot at
Campbell Soup.
"It's just a question of how much
more they can leverage that," Mr.
Baumgartner said. MBN
- L. Joshua Sosland
bakingbusiness.com / world-grain.com

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - January 3, 2017

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