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Consumer Food Stocks- Treasures or Trash? Read On To Find Out.

By Linda McDonough on September 27, 2017

Boy, it’s getting messy in the grocery aisle. Hastily arranged acquisitions and earnings warnings from food companies are pelting their stocks up and down. Investors have no idea if these stocks are better in their shopping cart or the garbage bin.

Subscribers to my Profit Catalyst Alert service are no stranger to my bearish take on consumer food stocks and the stores from which their wares are sold.

I’ve been squawking about problems for these companies since late last winter. The litany of woes battering profits of food manufacturers remain:

– Consumers are spending less on highly profitable processed foods.
– Retailers are cutting space for traditional brand names to make room for innovative ones.
– Wal-mart, the granddaddy of retailing, is demanding suppliers hand over additional price discounts.
– Low cost and very low priced foreign competitors like Aldi and Lidl are starting to open stores in the U.S.
– A pervasive shift to online food shopping eliminates most impulse purchases that grocery stores rely on to boost profits.

However, two events that I regard as quite negative were happily received by consumer food investors last week.

First, Post Holdings announced a $1.5 billion acquisition of Bob Evans (NSDQ: BOBE). Bob Evans, known for its fire engine red restaurant signage and comfort food menu, sold its restaurant business to a private equity firm last January. The slimmed down company that Post bought is made up primarily of packaged meats.

Post, who is involved in one of the bloodier food battles in the cereal aisle, has been gobbling up new companies with the hopes of gathering a few fast-growing morsels to reignite its growth.

Over the past five years, Post had acquired more than ten food manufacturers, several of them quite large. MOM foods, a maker of bagged cereal that copies name brands, and Michaels Foods, a company selling egg and potato products amongst other foods, added almost $2 billion of debt to Post’s balance sheet.

Despite the fact that Post’s $1.8 billion proposed purchase of British cereal maker Weetabix is not yet complete and despite the increasingly high valuations that Post is paying for these companies, its stock rose 1% on the day of the Bob Evan’s deal and remained up for the week.

The second event was supermarket chain Albertson’s purchase of food delivery service Plated. While neither purchaser nor the purchased company is publicly traded, Blue Apron (NSDQ: APRN), the market’s only barometer for home delivery stocks, jumped 16% on the news.

This reaction just seems silly to me. Blue Apron has been a disaster since its June IPO. The stock was priced at $10 and promptly dropped 50% due to production issues with its new manufacturing facility.

I reviewed the stock before it went public and warned investors it might give them a case of indigestion. I had no idea about the manufacturing issues, but slowing growth in revenue made me queasy.

Blue Apron’s short-lived bounce was due to investor hope that it too, could find a hungry buyer for its company. Alas, reason resurfaced and as investors realized Plated’s new billing as a part of bigger Albertson’s could increase competition, the stock dropped back down.

The rationale behind Post’s continued ebullience is lost on me. Traders holding the stock likely hope that scale will help Post cut costs and gain clout with its customers.

If the end market for these products was growing or even just static, that game plan might have a chance. However, with price competition just heating up the end market may just be declining.

General Mills (NYSE: GIS) and Campbell Soup Company (NYSE: CPB) are just two food companies that recently told investors demand remains weak.

Newcomer Aldi expects to have 2,000 stores in the U.S. by 2018. One is already in my neighborhood and prices are significantly lower than other chains. Aldi can offer such low prices partly by selling a fraction of the name brands that other stores do.

I don’t think that branded packaged food companies will be moving out of this house of pain anytime soon. The consumer shift to less packaged goods is a slow and massive trend. Bulking up in the face of shrinking demand sounds like eating rotten fruit just because your stomach is growling.

I’ll be looking to resurrect some old bearish favorites in this group while adding some new ones for Profit Catalyst Alert subscribers.

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