Seeking Alpha: Can Turnaround Efforts Put Farmer Brothers' Problems In The Past?

Right off the bat, I think it's important to note that Farmer Brothers (FARM) is riskier than average. There was an accounting restatement, the founding family has significant involvement in the firm (and not always for the best), and the company's financials do not impress whether you look at EPS, free cash flow, or book value. Fellow Seeking Alpha contributor Richard Pearson did a very thorough job of covering many of the problems of Farmer Brothers back in January ("Trouble Is Brewing At Farmer Brothers Coffee"), and though I don't agree with every point he made, I'd still suggest investors read it carefully as background material.

I am not as bearish as Mr. Pearson, but I would hardly call myself a strong bull on these shares. Reducing SKUs, improving inventory management, and more closely monitoring individual route/customer profitability should help margins. Unfortunately, a large part of this business is basically a low-margin distribution operation with few obvious competitive advantages over companies like Sysco (SYY) and with a heavy reliance upon small independent foodservice operators. Excluding the company's pension and workers comp liabilities, or offsetting them with its real estate value, the shares could trade to the mid-$20's, but this is one of those situations where I have to wonder if the hassles and risks are worth the potential rewards.

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Can Turnaround Efforts Put Farmer Brothers' Problems In The Past?

Investopedia: History Suggests Street Will Get Over "Disappointing" Smucker Results

I don't want to spend too much time defending Smucker's (NYSE:SJM) fiscal first quarter results, as I thought they were fine. Still, the Street is likely to be concerned about the pace of growth in K-Cups and the question of whether the company can maintain its significant share in the retail coffee business against the likes of Kraft (Nasdaq:KRFT), Green Mountain (Nasdaq:GMCR), and Starbucks (Nasdaq:SBUX). To the extent that history is any indication, I expect Smucker shares will be fine, though the valuation has gotten a bit steep in a still-expensive packaged food sector.

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Investopedia: Wall Street All In On Kraft's Improvement Potential

The way many sell-side analysts talk about Kraft Foods (Nasdaq:KRFT) and the company's CEO Tony Vernon, you would think they make sure to never go to bed at night before kissing a picture of them both and writing their names with little hearts substituting for the “o's”. And this is for a company whose organic growth just hasn't been that good since the split with Mondelez (Nasdaq:MDLZ).

Now, to be fair, I do think Kraft is a good business and a very well-run company. In more than a few cases, Kraft either dominates its category or frankly is the category. Moreover, I like the motivational approach the company takes toward incentivizing employees, the company's focus on innovation, and its willingness to shift resources away from brands that can't carry their own luggage. On the other hand, while I do share Wall Street's optimism that Kraft will eventually post margins and free cash flow that are just as good as, if not leading, its peers, the valuation already assumes precisely that.

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Investopedia: Smucker Does Alright, But The Street Goes Away Disappointed

I liked J.M. Smucker (NYSE:SJM) on a relative basis back in November, and the stock hasn't disappointed since – trading up about 20% and slightly outperforming peers like General Mills (NYSE:GIS), Kellogg (NYSE:K), and Kraft (Nasdaq:KRFT) in the packaged food space. I still like Smucker as a company – management is happy to run a business of relatively small, focused, market-leading brands, and run them pretty profitably. While guidance of a year-on-year decline in free cash flow (FCF) and stagnant sales may have disappointed the Street, this still remains a relatively interesting name in the food space.

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Investopedia: ConAgra Now Getting Almost Full Benefit Of The Doubt

It's been an interesting few months for packaged food companies. Volume trends have looked softer than expected as consumers continue to feel a pinch, but input costs have also eased up. Most significant, though, was the acquisition of Heinz (NYSE:HNZ) by Berkshire Hathaway (NYSE:BRK-A,BRK-B) and 3G and the near-immediate upward revaluation of the sector.

Against that backdrop, ConAgra (NYSE:CAG) continues to be a “yes, but...” company. As in, “yes, the RalCorp deal helps, but the company has to execute on the integration” or “yes, input costs are lower, but the company is having to spend on marketing/promotion to prop up weak volume”. While I liked ConAgra as an undervalued play in the sector back in December, I don't feel as strongly about it today given the significant move in the sector and this stock in particular.

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Seeking Alpha: Hormel Buys Skippy: Bold Move Forward, Or Future Sticky Mess?

Give credit where due - Hormel (HRL) is not just playing lip-service to the idea of being a more diversified packaged foods player. While many companies talk about wanting to make bold moves, Hormel has shown over and over again that its management team is actually willing to do it. The question, though, is whether the company's $700 million purchase of the Skippy peanut butter brand from Unilever (UL) is a bold move forward for the business, or a step too far outside of its competency.

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Hormel Buys Skippy: Bold Move Forward, Or Future Sticky Mess?

Investopedia: ConAgra Improving Margins, But Elasticity Is A Challenge

As investors have seen with General Mills (NYSE:GIS) a couple of days ago and now again with ConAgra (NYSE:CAG), the packaged food industry is still facing pretty challenging conditions. In particular, it looks as though companies can raise prices if they want, but they see an almost immediate hit to volumes. At the same time, give credit where it's due - ConAgra has continued to make progress with its margins. With Ralcorp (NYSE:RAH) now coming into the fold, the next year or two could be pretty interesting for ConAgra, even as the retail environment remains challenging.

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Investopedia: Green Mountain Coffee Roasters Gives The Street A Jolt

Apparently reports of the demise of Green Mountain Coffee Roasters (Nasdaq:GMCR) have been at least a little exaggerated. While the market pioneer for single-serve coffee brewing has some formidable challenges coming from increased competition, it's worth remembering that the consumer products market is not like the prescription drug market where generic launches immediately drive prices into the cellar. That said, it's not as though Green Mountain's valuation marks this out as an especially cheap stock today.

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Investopedia: If You're Going To Overpay For A Food Stock, Why Not Heinz?

I tend to believe that Wall Street overvalues the supposed stability of packaged/branded food and beverage companies, which is why investors seldom have the chance to buy the stocks of Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP) or Kellogg (NYSE:K) at really compelling valuations. Within the broader group of expensive food names, I can see an argument for owning Heinz (NYSE:HNZ) today. Not only is Heinz doing relatively well from an organic growth standpoint, but the combination of strong brands in developed markets and a very good presence in emerging markets is compelling to me.

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Investopedia: Even With A So-So Quarter, Smucker Looks Worth Watching

There aren't many bargains in packaged foods these days, and it seems like all too many quarterly reports require a little explanation. That said, J.M. Smucker (NYSE:SJM) still looks like a worthwhile name that could offer investors some upside. Management still needs to improve how it utilizes its assets, but volume trends are looking OK and the stock's valuation looks like a relative bargain in the space.

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Investopedia: Smucker Still A Relatively Tasty Option

I liked J.M. Smucker (NYSE:SJM) as one of my favorite food stocks a few months ago, and neither the company nor the stock have done anything to disappoint me since then. While valuation has certainly increased and the packaged food sector is still seeing pressure, Smucker remains a pretty solid idea in a sector that often sports a premium due to its perceived safety in tougher times.

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Investopedia: Smucker A Relatively Interesting Play In Food

As I've mentioned often in recent weeks and months, investors have reacted to the uncertain global growth outlook by bidding up the shares of those stocks and sectors seen as safe and relatively inelastic, and food has been one of the primary targets. While Smucker (NYSE:SJM) does have some challenges from private label competition, and the long-run returns on capital have not been good, the combination of growth, share and valuation makes this a relatively interesting stock to consider today.

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Investopedia: Cozying Up To Kraft

Familiar themes continue to dominate the packaged food space. Volume is weak across the board as bargain-priced private label brands grab share, but emerging markets remain an attractive source of growth. With some of the strongest brands in packaged food and the best overseas exposure of its American peers, Kraft (NYSE:KFT) seems to be separating itself from the pack a bit.

Results in Line with Prior Announcement  
Kraft made an early announcement of the highlights of its fourth quarter earnings, so the formal announcement on Feb. 21, 2012 held relatively few surprises. Revenue rose about 7% as reported, with organic growth coming in at a strong 6%. North America was surprisingly strong with 7% organic growth, while developing market growth was up a similar amount. Europe was the laggard, but still positive at 3% organic growth.

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Investopedia: TreeHouse Foods - Store Brands At A Premium Price

Sometimes the market falls in love with companies that offer premium-priced goods, and other times the fancies of institutional investors turn toward the world of discount retailers like Wal-mart Stores (NYSE: WMT) and Family Dollar Stores (NYSE:FDO) and the manufacturers or private label products like TreeHouse Foods (NYSE:THS). With high unemployment and nervous consumers dominating the story in retail, bargains are back in vogue. Although TreeHouse is a good company in a market ripe for further consolidation, investors should hold back and wait for a sale on these shares.

A Quality Problem For Q3  
Although TreeHouse met its numbers for the third quarter, how the company did so is an issue. Revenue rose about 14% from last year, but growth was boosted in a big way by acquisitions. The company's largest segment, North American retail grocery, saw almost 16% growth on a reported basis, but just 5% growth ex-acquisitions, and unit volume growth was just 1%.

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Investopedia: General Mills Between A Rock And A Hard Place

Brands matter a great deal in the packaged food industry, but they cannot do all of the heavy lifting. While ConAgra (NYSE:CAG) has suffered in part from its weak brand position (few leading brands across its portfolio), General Mills (NYSE:GIS) is finding that even its stronger brand portfolio does not immunize the company to the difficulties of today's market.


A Challenging Close to the Year
General Mills reported that sales rose 3% for the fiscal fourth quarter, missing the average analyst estimate by a trivial amount. Although the company got a solid boost from price and mix, volume fell 4% in the period. U.S. retail sales were notably weak (down more than 2%), but the company did get a nice boost from its international business. These international sales, boosted in part by a collaboration with Nestle (OTCBB:NSRGY), grew more than 16% for the fiscal Q4.

Although the company faces bruising input cost inflation, margins have held up fairly well. Gross margin rose a full point on an adjusted basis, while operating margin growth clocked in at 80 basis points. Even allowing for more effective ad spending and corporate cost containment, General Mills can only do so much to keep goosing operating income without better sales growth. (Your investments suffer when general price levels rise. For more, see Curbing The Effects Of Inflation.)



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Investopedia: ConAgra And Ralcorp - If You Can't Beat Them...

Everybody knows the old expression, "If you can't beat 'em, join 'em". Apparently ConAgra (NYSE:CAG) is taking a different strategy - "if you can't beat 'em, quit and try something else". With ConAgra publicly making a bid for Ralcorp (NYSE:RAH), it would seem that this large Nebraskan packaged food company is content to cede the field to the likes of Kellogg (NYSE:K), Heinz (NYSE:HNZ), Kraft (NYSE:KFT) and General Mills (NYSE:GIS) in branded foods and focus much more closely on private label and value-oriented products. 


The Deal That May Be
A deal between ConAgra and Ralcorp has been running through the rumor mill for a little while now, with Ralcorp recently mentioning that it had declined an unsolicited proposal while also preannouncing better-than-expected quarterly results. Clearly there was a not-so-subtle message here - namely, "we're improving quite well on our own, thanks".

Nevertheless, ConAgra has decided to go public with an offer of $86 per share in cash for Ralcorp. Not only does that represent a 32% premium to the pre-speculation price of Ralcorp, it also represents a sweetening of $4 per share from ConAgra's prior offer. 



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Investopedia: Diamond Foods Adds A New Facet

It was not that long ago when Diamond Foods (Nasdaq: DMND) was just a nut company with some clever commercials. Given the corporate maneuvers of the past few years, though, it is clear that management has goals and aspirations of becoming much more. With larger food companies apparently always on the lookout for ways to "manage" their brand portfolio, Tuesday's deal for Pringles may not be the last deal for this company. 

The Terms of the Deal 

Diamond Foods and Procter & Gamble (NYSE:PG) announced a deal whereby Diamond will acquire the Pringles brand and business in a somewhat convoluted split-off transaction called a reverse Morris Trust deal. Diamond will paying $2.35 billion for Pringles, with the deal to be structured around $1.5 billion of stock (29.1 million shares) and the assumption of $850 million in debt. There will be collars on the deal, though, that could move the debt portion up or down depending on the performance of DMND shares before the close of the deal.

As part of the deal terms, PG shareholders will have the option to exchange their shares in PG for DMND if they so choose. One way or another, current Diamond shareholders will own about 43% of the new company, so this clearly a large transaction for the company. (For more, see Mergers And Acquisitions: Understanding Takeovers.)

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