Shuanghui International's $7 billion deal to buy
Smithfield Foods, Inc.
about the pigs.
The big drivers here are China's need to increase food
supplies as a growing population demands a better diet, and
China's recurring scandals over food safety - whether it's
melamine in powdered milk and baby formula, or rat meat being
sold as lamb, or excessive levels of antibiotics in chicken.
(In March 2011, Shuanghui itself apologized for illegal
additives found in its meat, apparently because farmers in Henan
fed an additive to their pigs and then sold them to a company
Large numbers of Chinese consumers simply don't trust domestic
food suppliers, and will go to astounding lengths to buy overseas
products that are thought to be safer.
Chinese food companies know they have a problem. They can see
it in their sales numbers. For example,
China Mengniu Dairy Company Limited
(HKG:2319), the country's largest dairy producer, saw sales drop
3.5% in 2012 and operating profits fall 16%. The company blamed
the decline on food safety problems in China.
The stakes are really, really high. China's baby formula
market grew 29% last year to $15.4 billion. International sellers
controlled half of the baby formula market, but that's expected
to rise to 55% in 2013, as Chinese consumers with rising incomes
demand safer (and better) foods.
Of course, a problem for Chinese food suppliers is an
opportunity for overseas food companies. Here are the stocks of
ten companies that look likely to turn this opportunity into
profits for investors.
You can certainly see why China Mengniu would want to partner up
(OTCMKTS:DANOY). The Chinese company has 17% of China's yogurt
market, but also has persistent safety problems with its milk
(melamine, a plastic, in baby formula, for example) that have
hurt the company's reputation and sales.
What's in the recent deal for Danone? Yogurt sales in China
are projected to grow 57% to $11.6 billion by 2015. Danone has
just 1.6% of that market today, and derives 6% of its sales from
China, the company's fourth-largest market.
The tie-up with China Mengniu Dairy is one of Danone's two
recent deals in China. The company has also formed a joint
venture with state-owned Cofco (Mengniu's largest shareholder).
Danone will hold 49% of the joint venture, and thus indirectly
own 4% of China Mengniu.
The New York-traded ADRs for Danone trade at 18.7 times
projected 2013 earnings per share.
2. Mead Johnson Nutrition
You get a good sense of the opportunities in selling baby formula
to China by visiting any convenience store in one of New York
City's Chinese neighborhoods.
Along Main Street in Queens, for example, shop windows are
stacked full of cans of infant formula for sale to customers
traveling back to China, or for shipping by locals back to
relatives in China. That reflects just how much demand there is
in China for overseas brands of infant formula that promise
In 2008, six babies in China died and 300,000 became ill
because of melamine contamination in infant formula. In 2010,
Chinese authorities seized another 64 tons of contaminated raw
Last year, 75% of
Mead Johnson Nutrition Co
) revenue came from sales of nutritional products for infants,
children, and expectant mothers outside the United States. China
alone accounted for 30% of sales. (China/Hong Kong is now the
company's No. 1 market, with the US second and Mexico third.)
The company's sales in China/Hong Kong have doubled over the
last three years-and the sales breakdown has shifted: premium
nutrition products now make up more than half of sales.
Mead Johnson's five-year return on capital is 41.3%, compared
to 11.2% for its industry as a whole and 9.9% for the stocks in
(INDEXSP:.INX). The shares trade at 24.7 times projected 2013
earnings per share.
With its purchase of
) infant nutrition unit,
(OTCMKTS:NSRGY) became the biggest player in the infant nutrition
business. It didn't hurt that Pfizer's group generated 85% of its
sales from emerging markets.
Nestle has been working hard to increase its sales from
faster-growing emerging markets, which now account for 45% of
company sales. In the most recent quarter, Nestle's sales in
these markets grew by 8.4%, while sales in developed markets
increased by less than 1%.
But Nestle isn't just infant formula. The largest packaged
food company in the world has top-tier market share - 20 of
Nestle's brands generate more than 1 billion Swiss francs ($1.08
billion) a year in annual sales - in products from coffee to
The category that interests me the most going forward is
bottled water, where Nestle, remarkably, has been able to fight
The Coca-Cola Company
). The name of the game here is getting primary shelf space in
stores, and Nestle's brand clout lets the company do that.
Its ADRs trade at 17.5 times projected 2013 earnings per
4. Abbott Laboratories
(ABT) is the closest thing to a value play that you'll find in
the infant nutritional space. Nutritionals made up about 30% of
company sales, on a pro forma basis, after the breakup of the
company. (Abbott recently spun off its pharmaceuticals business,
That segment turned in 9% sales growth in the first quarter,
but even with 45% of sales in that business coming from emerging
markets, Abbott's margins in that segment trail its
Management's goal is to raise operating margins in the
nutritionals unit by 5 full percentage points by 2015. That, plus
a company-wide goal of raising emerging-market sales to 50% of
total sales (from 30% now) by 2015, should help fix the company's
extremely low return on invested capital - 10.2% for the last
five years. (That figure is for the pre-breakup Abbott. The
figure for Abbott Laboratories recently has been just 2%.)
The shares trade at 18.05 times projected 2013 earnings per
share. Abbott Laboratories is a member of
my Jubak's Picks portfolio
5. Dean Foods
The Smithfield deal suggests that some Chinese food companies -
perhaps with state prodding - may apply the same
resource-acquisition model to food that Chinese companies have
applied to strategic commodities such as oil.
(Although the Shuanghui International acquisition could be a
one-off, since it looks to be a private-equity deal that involves
the purchase of Smithfield Foods by a shell company based in the
Cayman Islands. The actual Chinese pork producer, Henan Shuanghui
Investment and Development, will have only a tenuous call on the
profits that will flow to the separately owned Caymans shell
Dean Foods Co
(DF), a purely domestic US milk processor, could make an
interesting target for a Chinese dairy industry that has been
snapping up overseas dairy assets in high-quality markets such as
New Zealand. (See Shanghai-listed
& Food Co., Ltd.
(SHA:600597) 2010 purchase of a 51% stake in New Zealand milk
processor Synlait, for example.)
The US milk processing market has significant overcapacity,
and Dean has growing free cash flow - $125 million by 2014,
according to projections by Credit Suisse - that could be used to
finance a deal or to pay out a significant dividend to an
The possibility that Dean would use that free cash to pay a
higher dividend to shareholders even without a deal makes this
stock a potentially interesting dividend-income play. The
company, Credit Suisse projects, would be able to pay a dividend
yield of 9.2% in 2014. (The company last paid a dividend in April
The shares trade at 18.3 times projected 2013 earnings per
6. WhiteWave Foods
A somewhat related pick: Now that Dean Foods has completed the
spin-off of almond milk and soy milk producer
WhiteWave Foods Co
(WWAV), I think the company is ripe for an acquisition bid.
The bid is more likely to come from a US food company such as
General Mills, Inc.
(GIS) than a Chinese food company, but in the current global
shuffling of food assets from developing to emerging economies,
you never know. (Dean Foods continues to own 20% of WhiteWave,
about $600 million in stock, after spinning off the rest of the
company in an IPO to shareholders.)
WhiteWave's overweighting of almond milk versus soy milk in
its product portfolio had been a drag on the company, as growth
in household almond milk consumption had been coming largely from
the cannibalization of soy milk consumption. But in the first
quarter of 2013, the company said that growth in almond milk
consumption is increasingly coming from dairy consumption.
In the first quarter, WhiteWave reported record US household
penetration of plant-based beverages. (And, yes, that is a
product category.) That comes on top of last year's
3-percentage-point increase in household penetration for
The company estimates that current projects to increase
production capacity and to build new warehouses will expand
operating margins by 0.5 to 0.75 percentage points annually for
the next three years. The stock trades at 24.3 times projected
2013 earnings per share.
7. Industrias Bachoco
Of course, not all food - not even all protein - is produced in
the United States.
, S.A.B. de C.V.
(IBA) is Mexico's largest poultry producer (and its No. 2
producer of eggs), with a 35% share of the Mexican chicken market
and a 10% share of the egg market.
In 2011, the company bought OK Industries, a US chicken
producer, to increase its market share in the United States. In
the first quarter of 2013, revenue grew by 7% but operating
margins fell to 7.6% from 8.3% in the first quarter of 2012, as
the company took a one-time charge as a result of an outbreak of
avian flu (influenza H7N3).
Net income fell 3.6%. Largely as a result of this drop in net
income, the company's American depositary receipts remain
relatively cheap, at 10.2 times projected 2013 earnings, despite
a 65% gain over the last 12 months.
(BRFS) is Brazil's second largest food company by revenue, and
the tenth largest food company in the world. In the first
quarter, this producer of poultry (34% of sales), pork and beef
(9%), dairy (9%), and processed products (40%) grew revenue by
14% year over year.
But what puts the company on this list is the 31% growth in
exports. (Exports make up 43% of company sales.) The company owns
two of the best brands in Brazil, Sadia and Perdigao, and one of
the few nationwide refrigerated distribution systems.
Like all Brazilian stocks, this one has sold off in the
current retreat in the Sao Paulo market, with the New York-traded
ADRs down 12.2% from May 14 through June 12. The ADRs trade at
21.9 times projected 2013 earnings per share.
Even this venerable maker of spices and flavorings (the company
was founded in Baltimore in 1889) is getting in on the China
On May 31,
& Company, Incorporated
(MKC) announced that it had completed its acquisition of Wuhan
Asia-Pacific Condiments, the maker of the DaQiao and ChuShiLe
brands of bouillon products. The products have a leading position
in the central region of China, the company says, and as such go
with McCormick's product portfolio in the coastal region.
What's impressive about that announcement is the company's
recognition that it has to customize its product offerings, not
just for China but also for China's very different regional
McCormick's revenue took a hit in late January when in its
fourth-quarter earnings report the company announced lower sales
to a major quick-service restaurant chain in China -
Yum! Brands, Inc.
(YUM). But from a low of $61.23, the shares rebounded to $74.74
on May 15. They've dropped only 4.5% in the recent market
The shares trade at 22.3 times projected 2013 earnings per
The June 6 announcement from the world's second-biggest
consumer-goods company that it will start manufacturing food
seasonings in Myanmar and invest $660 million there over the next
decade tells you pretty much all you need to know about why - at
the right price - you want to own a stake in
The company has been selling in Myanmar through third-party
A tested road map for approaching a developing economy by going
deeper in a few categories, such as seasonings, shampoos, and
An eye for growth opportunities:
The number of people in Myanmar with sufficient income for
discretionary spending could rise to as many as 19 million in
2030 from 2.5 million now, according to a report by McKinsey
Global Institute. (The population is 60 million.)
Unilever's ADRs trade at 17.9 times projected 2013 earnings
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Editor's Note: This article was written by Jim Jubak of
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