Milling & Baking News Corporate Profiles - November 2013 - (Page 8)

Editorial Share price performance remains at odds with food industry financials I s the food industry prospering? Is its outlook bright? In a nutshell, these are the basic questions we expect readers of Corporate Profiles to be able to answer each year after delving through the pages of this annual compendium, offering snapshots of individual companies and reviews of key industry segments. While the profiles of the operational ups and downs of the industry may offer one set of insights regarding the industry's health, the stock market offers a different perspective. And for a second consecutive year, the disparity between the stock market performance and the operating results of the industry's largest companies has been gaping. Judging by Wall Street performance alone, food processing industry executives would have cause for jubilation. Looking at 11 of the largest diversified food processing companies, share price performance in the 12 months ended Oct. 31 was nothing short of dazzling. Shares of all 11 companies scored gains during the year that exceed 20% with two topping 30%. Food shares tend to lag when the overall stock market goes on an upward tear, but that hasn't been the case in the past year. The average gain of 26.3% among the largest food companies was right in line with the 27.1% gain for the S.&P. 500-share index for the same period. Taking a longer view, the share price performance of food stocks is even more impressive. In the six years since just before the stock market plunge began in October 2007 (the market peaked in that month), food company shares have outgained the broader market by extraordinary margins. Three of the largest food companies - General Mills, Inc.; The Hershey Co.; and The J.M. Smucker Co. 8 \ November 2013 - enjoyed a more than share price doubling. The average gain among the top companies during the six years was 80%, versus only 29% for the S.&P. 500. Against the backdrop of this stock market exuberance, the financial outcomes of the leading food companies in recent years have been checkered at best. Considering that stable and predictable growth are thought to be qualities stock market investors most prize in a mature industry like consumer packaged foods, the stunning food stock performance is puzzling. Looking at operating income in the most recent fiscal year, two-thirds of the companies saw a decline from peak earnings of the last five years. On average, operating income in the last fiscal year was down 9% from the record achieved in the earlier years. In terms of achieving steady, predictable growth, the results were equally unimpressive. Comparing year-to-year changes in operating profits, food companies achieved earnings gains an average of 2 1/3 times and declines 1 2/3 over the last four years - just a bit better than a flip of a coin. Only two of the largest nine companies saw earnings rise for each of the last four consecutive fiscal years, the same number of companies that saw earnings climb only once in the last four years. So which is the better measure of the "state of the industry," the share price gains or the financial results? The narrative of the Corporate Profiles seems far more closely aligned with the financial results. Indeed, while top executives of the largest food companies continue to describe aggressive steps they are taking to better position their businesses for changing market conditions, their analysis of conditions "on the ground" in many instances could be characterized as worried if not alarmed, even as they express optimism about their own company's positioning. For example, Tony Vernon, chief executive officer of Kraft Foods Group, Inc., described the retail marketplace as a war zone, with "competitive Armageddon activity" in pour-able and spoon-able dressings and "a pitched battle" in cold cuts. Difficulties also were described in the company's important macaroni and cheese category. "We have formidable foes, and some of the bigger players are getting into this with some of the entrants," Mr. Vernon said. "We'll continue to battle." Of even greater concern is the sheer number of major companies in the midst of soul searching after spending many years and extraordinary resources carefully aligning their businesses for maximum growth. Companies such as Kraft, Nestle S.A., Mondelez International Inc., PepsiCo, Inc., Kellogg Co., Campbell Soup Co. and ConAgra Foods Inc. have either announced major initiatives to get back on track or have been criticized for not doing so. While such steps long have been the norm for one or two of the largest companies in any given year, difficult questions arise when this large a number of companies struggle. Illustrations here include the major capital spending initiative announced at Mondelez, a strategic review of struggling North American businesses at Nestle and (an example at a smaller company), a decision by Post Holdings to acquire a pasta company. More generally, the factors contributing to the challenges vary widely from one company to the next, and include volatile ingredient markets in recent years, a slowdown of growth in international markets and, as Mr. Vernon noted, the intensity of competition in U.S. retail. Progress in these and other battlefronts for food companies will be necessary if the share price gains of recent years is to be sustained. CP Milling & Baking News * Food Business News * Baking & Snack * Meat & Poultry Corporate Profiles

Table of Contents for the Digital Edition of Milling & Baking News Corporate Profiles - November 2013

Milling & Baking News Corporate Profiles - November 2013