Newspaper article The Christian Science Monitor

Food Producers Enter Lean Period

Newspaper article The Christian Science Monitor

Food Producers Enter Lean Period

Article excerpt

FOOD company stocks - which were among the most popular equities of the 1980s - are suddenly finding themselves out of "flavor" with many investors. The stock is seen as high-priced and the industry as intensely competitive.

Investors should buy food company stocks "with extreme prejudice," says David Goldman, an analyst with Oppenheimer & Co., an investment house. Industry growth has slowed. Profit margins are tight. There are still many promising companies, he says. But one should look for "unique" firms that have the potential for accelerated growth.

During the 1980s, packaged-food stocks were red-hot issues. The industry outperformed the broader stock market in every year except 1987, according to Walt Pearson, a vice president with J. & W. Seligman & Co., an investment house.

Food stocks also outperformed the market in 1990 and 1991. But during the first quarter of 1992 the industry has been sagging. Nonetheless, Mr. Pearson says the food industry should rebound and generate earnings growth of at least 12 percent. That's a solid number, but well below the 20 percent growth range of the mid-'80s. Much of the euphoria surrounding food companies during the 1980s was linked to the mergers and takeovers of that period. Pearson sees the next few years as "much tougher times for the industry" to expand sales volume or profit margins.

One result, he says, will be a widening disparity between the dominant and most-profitable food companies, such as Philip Morris, and smaller, less profitable firms.

Philip Morris, which owns Kraft General Foods International (KGFI), is generally considered the premier United States food company. It has a wide range of products, dominant market share, and the potential for continued growth abroad. Pearson anticipates that Philip Morris will continue to post earnings growth in the 20 percent range. Looking at other major producers, he predicts that General Mills will post growth in the 15 percent range and Sara Lee, 13 to 14 percent.

Competition among the cereal companies underscores the growing disparity among food producers; both Kellogg and General Mills are not currently losing market shares, "but the No. …

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