Sunday, August 11

Week 110 - Capitalization-weighted Index of 20 Leading Food Producers

Situation: In our blog for Week 100, we studied the overall food and beverage industry, noting that it is fragmented but remarkably profitable. For investors, the problem is to find out which companies can remain efficient at cost & debt control while having a sustainable business plan.

So we’ve drilled down on producers around the world and come up with 20 companies (Table), by evaluating long-term Finance Value (Col E in Table) and recent trends in cash-flow and sales. The list includes 3 seed producers (MON, DD, SYT), fertilizer producers (POT, AGU, MOS), one agricultural products wholesaler (ADM), two soft-drink companies (PEP, KO), and 11 producers of packaged foods and meats (MDLZ, CAG, CPB, HRL, K, GIS, SJM, HSY, TSN, NSRGY, DANOY). When 10-yr total returns (Col C in the Table) are compared to the market capitalization of these companies (Col L), we see that stock performance (Col C) times capitalization weight (Col M) gives an overall 10-yr total return of 11.9%% (Col N). This is significantly different from the average return of 14.2% (Col C), indicating that outperformance by smaller companies is distorting the average performance (which is a finding with almost all industries). Interestingly, 4 of the top 6 companies (performance X capitalization) are based outside the US: Potash (POT), Nestle (NSRGY), Syngenta (SYT), and Danone (DANOY); Coca-Cola (KO) and Monsanto (MON) are the US-based companies.

Bottom Line: The problem US investors have picking food stocks is that many of the best companies are foreign, with Nestle being the most familiar name. Buying stock in a foreign company is challenging, since currency fluctuations can have a remarkable influence on the dollar-denominated conversion value of the stock, particularly for companies like Syngenta and Nestle that are based in Switzerland.  

News Flash:  Commodity investing is a global game. You're a player to the extent that such companies in your portfolio are either based outside the US, or get most of their sales there.

Risk Rating: 7

Full Disclosure: I have stock in KO, POT, GIS, DD, and HRL.

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