Eat, Drink and Be Wary? - Analyst Blog
December 23 2011 - 2:32AM
Zacks
Spiked food prices are threatening to dampen the holiday
spirit.
According to the U.S. Labor Department, grocery store prices
peaked 5.9% in November compared with the same month a year ago.
The food marketplace remains clouded with continuing inflationary
pressures as US food companies continue to wrestle with high costs
of raw ingredients. The sluggish business condition for frozen
desserts, bakery items, pizza, frozen products, soup, noodles, etc.
has raised concerns for quite some time.
The Industry Loses Pace
In the U.S., consumers spend approximately $1 trillion annually
on food, or nearly 10% of the Gross Domestic Product (GDP). Within
the food "pie," packaged food comprises a chunk of 31%. But, the
recent trends of rising food prices have affected consumption
demand.
Facts substantiate that the effect of food industry deceleration
has not only been confined to the Food Making business and its
consumers but percolated down to the supply chain, affecting retail
distributors, raw material suppliers and farmers, to name only a
few.
Where It All Started
In hindsight, consumption of frozen packaged foods remained
relatively stable even during the recession in 2010, as consumers
resorted to having frozen food at home, which is a cheaper
alternative than visiting restaurants. The US frozen processed food
market was estimated close to $30 billion in 2010. However, the
Packaged Food industry, both fresh and frozen, started
slowing down in the aftermath of the recession. Given the high raw
material prices, the sluggish trend has continued since then.
Dismal Trends
ConAgra Foods Inc. (CAG) and General
Mills Inc. (GIS), two of the largest US consumer packaged
foods companies by revenues, reported a fall in net income, in the
second quarter 2012, in spite of rising sales. Net income at
ConAgra, makers of brands like Slim Jim and Chef Boyardee, fell
13.4% year on year to $174.7 million, or 41 cents a share, despite
an 8.1% rise in sales to $3.4 billion.
Operating profits from consumer foods segments declined. General
Mills reported a 27.5% fall in its second quarter net income.
Evidently, the higher input costs exerted pressure on profit
margins. However, net sales were up 13.7% y/y to $4.6 billion.
Jennie-O Turkey brand's Hormel Foods
Corporation (HRL) posted financial results for the fourth
quarter and fiscal 2011 with an EPS of 43 cents, down 4% from 45
cents in the prior-year period. Net sales however rose 2% to
$2,103.9 million.
The Aperitif
The projected US inflation in 2012 -- a rate fairly above 2% --
remain a concern. The estimated price rise, especially in the
Packaged Food industry, indicates that the food and beverage market
growth will trail that of the overall U.S. economy. However, the
shoppers are anticipating a rebound in their personal finances with
the optimism to return to the lifestyle of the pre-recession
levels.
We believe that the economy would improve and the U.S. food and
beverage market would revive in 2012, shored up by reinvigorated
consumer demand.
CONAGRA FOODS (CAG): Free Stock Analysis Report
GENL MILLS (GIS): Free Stock Analysis Report
HORMEL FOODS CP (HRL): Free Stock Analysis Report
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