Sunday, December 2

Week 74 -Food Production Companies in the Russell 1000 Index

Situation: Last week we looked at a snapshot of food-related companies--those listed on the Omaha World-Herald 150 Index. This week we take on food production companies, screening the 150+ stocks in the Dow Jones US Food Production Index to drill down on the 18 largest companies, namely those listed in the Russell 1000 Index. The point is to set aside (for now) those companies that are peripheral to food production (railroads, farm equipment manufacturers, grocery stores, restaurants, bottlers, grain brokers, futures exchanges) and focus on the companies that produce food from animal protein and cereal grains. In the Table, you’ll see two companies that aren’t in the Russell 1000 Index: 
   a) Lancaster Colony (LANC) which is now large enough to appear in the next revision of that Index; 
   b) Syngenta (SYT) a Swiss company that competes directly with Monsanto (MON) to market crop protection (CP) materials and genetically-engineered seeds. SYT holds the number one position globally in CP materials with 19-20% of the market.

Of the 20 companies listed in the Table, only Hormel Foods (HRL)  and LANC are free of red-flagged items (i.e., “let the buyer beware”). But 7 more companies have been remarkably profitable over the past 5 & 10 yrs, and lost no more than 65% as much as the Russell 1000 Index during the Lehman Panic. Those 9 companies meet the “business case” for investment (see Week 71) by having at least the 7.18%/yr growth rate that is needed to double your investment within 10 yrs, as well as a combined dividend yield and dividend growth rate of at least 7.18%/yr: SYT, GIS, FLO, HRL, HNZ, HSY, SJM, LANC, MKC. This is a remarkable accomplishment for any company given that half of the last 10 yrs has seen the business world consumed by the Lehman Panic and its after effects.

Bottom Line: Food production will increase because the high prices that food products now command will justify cultivation of even marginal farm lands. Droughts will lead to more irrigation, while technology continues to improve drip irrigation methods to reduce evaporation and runoff. Higher food prices are inevitable after a drought and are occurring already but companies such as Tyson Foods (TSN) are finding that there is no loss of revenue when those costs are passed on to the consumer, as reported by the WSJ

In summary, food production companies are already quite profitable and stable investments but the future appears even brighter. A reasonable approach is to create your own specialty fund by taking capitalization-weighted positions in all 4 of the companies in the accompanying Table that have a “business case” for investment and are free of red flags with respect to return on investment, long-term debt and cash flow (Columns K, L & M in the Table): LANC, SYT, HRL, GIS.

Risk Rating of this blog: 6 (see Week 72).

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