Related Stocks: KFT, NSRGY.PK
Major food conglomerates have recently been reinventing themselves with a more health-conscious image and expanding in the emerging markets. I consider two of the best to be Kraft (KFT) and Nestle (NSRGY.PK), which are both going through a series of managerial changes for the better.
Well Krafted Plans
Recently freed from control of tobacco giant Phillip Morris (MO), 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 one of the opening moves of this new strategy is the proposed $7.2 billion purchase of Danone’s cookie and biscuit unit, an acquisition that would make Kraft the world’s leading cookie manufacturer.
According to Sanford C. Bernstein & Company research, the Danone transaction should result in $200 million in synergies. It would also deliver access to better markets, as Danone’s segment is growing at 4.2% annual 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.
Carl Ichann has also taken an undisclosed stake and Warren Buffett has taken a position under 5%. It is also interesting to note that some of Buffett’s management teams have had previous stints at Kraft. In particular Marla Gottschalk, who previously spent 10 years at Kraft, is now the CEO of Berkshire-owned Pampered Chef. Perhaps the experience knowledge brought by these Kraft veterans to Berkshire will help Buffett form a strategic plan.
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 based on 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 been 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 the Gerber baby foods brand and hospital nutrition divisions from Novartis AG, and Jenny Craig dieting products. Some of these new businesses offer better profitability than Nestle’s core portfolio. For example, the hospital nutrition market has high margins and a 7% growth rate, compared to 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 Alcon and a 29% stake in L’Oreal 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, both of these companies have been early birds to this market. Of Nestle’s total revenues, 2.5% come from China with double-digit growth. Kraft has also established itself in China as the number one player in powdered beverages and biscuits, and number two in coffee with its Maxwell House brand.
If we face an economic slowdown in the United States (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. Even without such a recessionary-mode shift, significant managerial and strategy changes will propel these food titans to higher growth.
Full Disclosure: At the time of this writing, Winston is long KFT.