Sunday, November 1

Week 226 - Grocery and Drug Stores, Restaurants and Their Suppliers

Situation: Food-related businesses supply an “essential good.” In the US, families spend approximately 10% of their income on food. Today’s blog is the last of a 4-part series covering food-related companies in the 2015 Fortune 500 list, which ranks 1000 companies by revenue and provides specific information about each company’s relation to the marketplace. Week 210 covered Agronomy and Food Production Companies; Week 218 covered Food Consumer Products, and Week 219 covered Agricultural Production Equipment. 

Mission: Provide details related to investment metrics for companies at the final stop in the food supply chain. Those companies are grocery and drug stores, restaurants, and specialized trucking companies serving those establishments. Our second focus is to reach conclusions about the benefits and risks that stockpickers need to consider when buying stock in these companies, particularly as a long-term holding for a retirement portfolio.

Execution: The prosperity of any company is determined, in part, by input costs. For food-related companies, the key inputs are cereal grains and soybeans, whether used to make food directly or indirectly (by feeding animals). Prices paid for those raw materials will depend on the economics of production at farms and ranches worldwide. As with other commodities, the up-front “fixed costs” of food production are very high. That large investment will be capitalized mainly with borrowed money. Therefore, a farmer faces major uncertainties on two fronts: interest rates and the weather. When interest rates are low and weather is optimal in major food-producing regions, there will be an overabundance of food commodities and prices will fall 30-50%. That leaves farmers with little or no money after servicing mortgages on their land and equipment, and buying seed and fertilizer for next year’s crop.

Bottom Line: Food-related businesses are speculative enterprises. Of the 13 in this week’s Table, only one can be considered suitable for inclusion in a retirement portfolio: Sysco (SYY). That is a trucking company which delivers food (in various stages of readiness for consumption) to grocery stores, restaurants, and institutions.

Risk Rating: 6

Full Disclosure: I own stock in McDonald’s (MCD).

Note: Metrics highlighted in red denote underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX). Metrics are brought current for the Sunday of publication.

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