Milling & Baking News - January 5, 2016 - 25

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Stock Market Analysis

noise and forces them to do it. You're
seeing big restructuring programs and
some new processes, particularly zero-based budgeting, implemented by
the likes of Kellogg (Co., Battle Creek,
Mich.), Campbell Soup (Co., Camden,
N.J.) and several others.
"That's the lens they are looking
through today."
These efforts have begun to yield
positive results, Mr. Moskow said.
Gross and operating margins improved in 2015 and appear likely to
widen further in 2016.
"Another positive in 2015 was
share price performance that was better than the market overall," he said.
"Going into 2015, every year for the
past three, we've said that cost cutting and consolidation would keep
valuations afloat, even though fundamentals, sales are not that great. This
year, we kind of got it right in that
sales did not grow. Margins
went up. What I didn't expect
was for the stock prices to go
up as much as they did."
The prospects for improved
margins do not mean easy sailing going forward for the food
companies, Mr. Moskow said.
"Many companies have international exposure and are likely
to face currency headwinds as a
result," he said.
The outperformance of food
company shares in recent years
has been driven principally by

low interest rates and the perception
that as they rise, they will do so "at a
slower and ponderous pace," he said.
"Secondarily, maybe 25%, is the
merger and acquisition activity and
the reaction of these companies to
avoid becoming acquisition targets,"
he said.
Because top-line sales trends have
disappointed for so long, Ms. Aslam
said she is looking for "self-help stories" when considering which food
companies represent the most promising investment opportunities.
"Self-help stories are companies
where I don't need to depend on the
consumer for them to work," she said.
"TreeHouse (Foods Inc., Oak Brook,
Ill.) happens to be one of our favorite
names right now. They recently announced the acquisition of ConAgra
private brands for $2.7 billion. It's the
largest acquisition in the history of
the company and transforms it into
the leading private label player in the
United States. The acquisition is expected to be dilutive in year one but
add 55c to 70c in year two and $1.50 to
$1.65 in year three. When you consider the earnings base for 2015 is $3.10,
that year three e.p.s. accretion is pretty
meaningful. Annual revenue when the
transaction is completed will be $7 billion, and EBITDA will be $700 million.
The deal meaningfully expands TreeHouse's presence in private label, dry
center of store grocery and expands
its presence in the refrigerated space,

where they had not played before."
While recognizing the risk of acquisitions (the private label business
TreeHouse is acquiring performed
poorly at ConAgra Foods), Ms. Aslam
said her confidence about TreeHouse
is bolstered by the company's strong
track record of buying and integrating
companies.
"That's how they've grown from
$500 million a decade ago to about $3
billion in 2015," she said.
The slump in commodity prices
since the middle of 2014 creates a
promising market environment for
The J.M. Smucker Co., Orrville, Ohio,
Ms. Aslam said.
"They are enjoying extraordinary
commodity tailwinds," she said.
"Their largest core business is coffee,
and coffee prices are down about 20%
to 25% year over year. They are implementing their own zero-based budget
cost cutting program."
She also is a fan of the Smucker acquisition in May 2015 of Big Heart Pet
Brands for $5.8 billion.
"We think Big Heart adds another
leg of growth to the Smucker story,"
she said. "Big Heart has the leading
position in the $2.1 billion pet foods
and snack category. They are No. 1 in
pet snacks with Milk Bones, No. 2 in
dry cat food with Meow Mix and are
expanding into the premium dog food
segment with Natural Balance.
"The company is well positioned
to deliver three years of double-digit

Ingredion

J&J Snack Foods

Kellogg Co.

$100

per share

per share

$128

2015

$90

2015

$116
$104

$70

$92

2014
$60
Jan. March May July Sept. Nov.

2014
$80
Jan. March May

per share

2014

2015

$63

July Sept. Nov.

2014
$57
Jan. March May

July Sept.

Nov.

Maple Leaf Foods, Inc.

Kraft Heinz Co.
$84

$25

per share

$69

$80

Krispy Kreme Doughnuts, Inc.

$75

per share

per share

$26
2015

$80

$20

2015

$22

$76
$15

$18

$72
2015

$10
Jan. March May

July Sept.

bakingbusiness.com / world-grain.com

Nov.

$68
July

Sept.

Nov.

2014
$14
Jan. March May

July Sept.

Nov.

Milling & Baking News XJanuary 5, 2016 / 25
http://www.bakingbusiness.com http://www.world-grain.com
Milling & Baking News - January 5, 2016

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