Milling & Baking News - January 21, 2014 - 23


outperform during periods of inflation," he said. "I think that reflects the
fear that the slippery slope of promotion and companies' willingness to use
gross margin expansion to fund promotion tends to get out of hand. So we
see it as an area of concern rather than
as a positive. Many companies talk
about price elasticity models that are
broken. Recent history shows promotions don't work as well as they used
to. They lead companies into worrisome spending habits."
Making promotions more tempting
has been volume trends in center of
store categories that have been very
disappointing in the United States and
Europe, Mr. Katzman said.
"I don't think the industry has a
great explanation yet as to why that
is," he said. "Most of these companies' earnings models are predicated
on some type of volume growth.
Add a little mix, market share gains,
efficiency improvements, new products and suddenly, mid-single digit
EBIT growth, high single digit E.P.S.
growth. All these are based on some
volume growth. Food companies are
battling for a consumer that is seemingly shopping less."
To their credit, food company executives enter 2014 with more conservative forecasts for growth than was the
case in 2013, Mr. Moskow said.
"The only real bull case for these
companies is that commodity deflation
should boost margins, which assumes

that pricing will be sticky," he said. "I
think consensus estimates for E.P.S.
growth are pretty high - 9% for food
group is consensus, up from 7% in 2013.
This sounds overly optimistic to me."
Calling the overall food business
"pretty stable," Mr. Moskow said traditional makers of consumer packaged
foods are facing serious challenges.
"Consumers are shifting on the high
end to homespun organic or other
niche products," he said. "On the low
end, they are going to private label.
From a branded perspective, there are
just as many headwinds as there are
tailwinds, if not more."
Any number of attributes elevate the
outlook for individual food companies,
Mr. Katzman said. These may include
significant steps toward restructuring
adopted by management or the positioning of companies in favored categories such as organic, snacks or confectionery as well as companies with
exposure to emerging markets.
"Those companies are doing well,"
he said. "Valuation fundamentals reflect good underlying growth in the
categories. For those companies, 2014
looks promising."
Among the grain-based foods companies favored by Mr. Katzman, Flowers Foods, Inc. stood out as a "unique
situation," he said.
"It is the second-largest bread company in the United States with an opportunity to gain significant market
share in the next couple of years as

General Mills, Inc.

Flowers Foods, Inc.
per share

$26

$70

2013

$56

2013

$18

$10
Jan. March May

July

Sept. Nov.

Hain Celestial Group
per share

$100
$80

2012

$42
$35
Jan. March May

July

$100

July

per share

2013

$60
2012

$40

$60
$50

2012

2012
$20
Jan. March May

Sept. Nov.

2013
$80

$60

2012

$28
Jan. March May

J&J Snack Foods

per share

$70

2013

Sept. Nov.

$35

Ingredion
$80

2013

$42

$49
2012

per share

$49

$56

$14

they leverage liquidated Hostess assets," he said.
In July, Flowers Foods completed
the acquisition of most of the assets
of Hostess Brands, Inc., including 20
baking plants sprinkled across large
swaths of the United States.
"I would say that strategically, they
managed the Hostess bankruptcy perfectly," Mr. Katzman said. "Think about
it. They had the opportunity to buy
Hostess during many, many years. They
waited until liquidation to pick off assets at the prices they wanted without
pension liability or union challenges.
That led their fundamentals to be extraordinary in 2013. They gained significant market share as Hostess ceased
to be on the shelf. They have picked up
the assets in a position where they can
almost guarantee growth in the future."
While earnings estimates for 2013
were lowered late in the year, Mr.
Katzman said he isn't concerned
about Flowers' ability to execute. He
noted Flowers had been hesitant to
issue earnings guidance much of the
year because of uncertainty in the face
of all the changes going on in baking.
"I think they have proven their
ability in fresh bread and rolls to be
one of the best managed businesses,
and their integration of these assets
I believe will go very smoothly," he
said. "They basically have bought
assets and will reopen assets when
they want. It's all under their control. Retailers want them to be a

Grupo Bimbo S.A.B. de C.V.

per share

$63

$22

Stock Market Analysis

July

Sept. Nov.

bakingbusiness.com / world-grain.com

$40
Jan. March May

July

Sept. Nov.

$40
Jan. March May

July

Sept. Nov.

Milling & Baking News January 21, 2014 / 23

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

Milling & Baking News - January 21, 2014

Table of Contents for the Digital Edition of Milling & Baking News - January 21, 2014