Bring your appetite
By Gene Walden
(From the Minneapolis StarTribune)
If you’re looking for a burgeoning trend to invest in, you might consider the bulging waistline of the American consumer.
We’re eating more, dining out more, and packing on more pounds than ever before. Our growing appetite has spawned a universe of food-related investment opportunities that is expanding almost as quickly as the average American belt size.
Food producers, such as General Mills and Hormel, restaurant chains and supermarkets have all fattened their balance sheets on the super-sizing of America—as have vitamin makers, diet plan providers and fitness clubs. Pharmaceutical companies have also seen increased sales of their life-saving blood pressure and diabetes medications, as well as the artificial hearts, hips and joints that keep the hefty hardy and on their feet.
Scientists are still puzzled over why the ranks of the overweight continue to swell. After all, the word is out about fit versus fat— we understand the health benefits of diet and exercise and we recognize that extra weight brings extra risks.
But we just keep piling on the pounds.
Why? Try as we might to stay fit and trim, the will power of the American consumer is simply no match for the collective marketing might of the food industry.
When you watch TV, you’re constantly enticed with commercials for Big Macs, Whoppers, tacos, fried chicken, soft drinks, beer, chips, candy, pastries, and a host of other taste temptations. Open late, open early, drive through. You never have to leave your car.
The R&D juggernaut
But the real battle of the bulge is won behind the scenes in the testing kitchens and tasting labs of the giant food companies. They spend hundreds of millions of dollars a year in research to identify, test and roll out irresistible new taste treats.
General Mills spent $173 million last year in research and development and Hormel spent about $19 million. Hormel reports that it has 55 employees engaged in full time research—26 who work on improving existing products (can Spam really be improved?) and 29 in product development.
Every year, food and beverage companies test thousands of new recipes, sauces, spices, and flavor combinations. Once a product has been successfully developed in the test kitchen, it moves onto the tasting lab where researchers assemble panels of consumers to sample the new items.
If a product passes the scrutiny of the consumer test panels, it continues down the food chain to marketing, where skilled specialists create commercials designed to drive us to the stores and packaging designed to jump off the shelves at us.
It’s no wonder we can’t stop eating—the food industry has turned our taste buds into a fine science.
Investing in foods
The food sector has always been one of the most solid sectors of the stock market. Most blue chip food stocks pay a decent dividend and tend to have fairly steady, long-term growth.
The best bet for rapid growth in the food industry is probably the restaurant sector, where a hot new chain can expand quickly across the country. But once the growth phase is over, restaurant stocks often become stagnant.
Starbucks’ success is well known in investing circles, but how has Minneapolis-based Caribou Coffee done since going public two years ago. Caribou, which has yet to turn a profit, reached a high of over $11 a share right after its initial public offering, but the stock has slipped steadily since to about $6.50 a share.
Famous Dave’s was off to a fast start after its initial public offering, but saw its stock price plunge from about $18 to under $5 a share in 2003. Since then, steady earnings and revenue growth have helped the Minnetonka-based barbeque chain recover steadily to an all-time high last week of about $20 a share.
Buca, the Minneapolis-based Italian restaurant chain, also moved up quickly after going public, but it has faced a raft of problems recently. Its stock price is down more than 30 percent over the past year, from about $6.50 a share to about $4.20 a share last week.
Minneapolis-based Buffalo Wild Wings has been on a hot streak the past year after several years of lackluster performance. Propelled by 80 percent earnings growth last year, the stock has more than doubled, from about $40 a year ago to $85 last week.
General Mills, which has posted fairly flat earnings and revenue the past few years, has had a nice run-up in the market the past year, with a gain of nearly 20 percent (from about $50 a year ago to just over $60 last week). The stock pays a dividend yield of about 2.5 percent.
Hormel has had solid earnings growth the past two years—from $1.65 a share in 2004 to $2.05 in 2006—which has helped push the stock price up from about $30 two years ago to nearly $40 last week. Hormel pays a dividend of about 1.5 percent.
Although food stocks are not likely to give you spectacular returns, the blue chip firms are a good bet for steady, long-term growth and a solid dividend. Just don’t eat the profits.