Bad weather is making our food more expensive. Should we expect this to be the new normal for food stocks?
Food has gotten much more expensive in 2014.
Sugar prices in particular have gone through the roof, up more than 14% according to the United Nations' Food and Agricultural Organization (FAO). The FAO's Food Price Index is up more than 5%, affecting everything from meat and corn to grain and vegetable oil.
A lot of the blame for the price spike belongs to the weather. The headline-grabbing drought in the American West has driven up corn and wheat prices. Similar conditions among top sugarcane producers Thailand and Brazil also reduced production in those commodities. And when corn, wheat, and sugar get expensive, other things like meat and fuel (ethanol) do as well.
There are also some geopolitical factors at play, most notably the situation between Russia and the Ukraine. Ukraine is a major grain exporter, which may account for the 8.89% jump in the price of your breakfast cereal.
Depending on where you stand with regards to climate change, it's starting to seem like the weather is getting more unpredictable, perhaps even faster than earlier estimates forecasted.
That will make food stocks a very interesting play. A lot of them trade closely to certain commodity prices, for instance Sanderson Farms (SAFM) which sells chicken products. Higher grain prices mean higher costs, but meat suppliers are benefitting from an unusually fast and early increase in wholesale meat prices. It's also worth mentioning that the USDA expects the heftier price tag to push more people towards poultry this year, with consumption rising to 100.1 pounds from 99.1 pounds in 2013.
If you're looking to chow down on some food stocks, you may want to take a look at this index of undervalued companies in the industry. We started with the 50 food producers and wholesalers that trade on US exchanges, and screened for companies with a high ratio of levered-free cash to enterprise value (LFCF/EV).
These companies have extra cash on hand relative to their size, indicating that their balance sheet might be able to support a higher stock price. There were three companies left on our list.
Click on the interactive chart to view data over time.
1. Sanderson Farms, Inc. (SAFM, Earnings, Analysts, Financials): Engages in the production, processing, marketing, and distribution of fresh, frozen, processed, and prepared chicken products. Market cap at $1.62B, most recent closing price at $72.23.
Levered free cash flow at $179.74M vs. enterprise value at $1.75B (implies a LFCF/EV ratio at 10.27%).
2. Archer Daniels Midland Company (ADM, Earnings, Analysts, Financials): Archer Daniels Midland Company procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. Market cap at $26.63B, most recent closing price at $40.16.
Levered free cash flow at $3.83B vs. enterprise value at $31.77B (implies a LFCF/EV ratio at 12.06%).
3. The Andersons, Inc. (ANDE, Earnings, Analysts, Financials): Engages in the agriculture and transportation businesses in the United States. Market cap at $2.29B, most recent closing price at $54.17.
Levered free cash flow at $197.05M vs. enterprise value at $1.76B (implies a LFCF/EV ratio at 11.2%).
(List compiled by James Dennin. Monthly returns sourced from Zacks Investment Research, all other data sourced from Yahoo! Finance.)
Analyze These Ideas: Getting Started
- Read descriptions for all companies mentioned
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Dig Deeper: Access Company Snapshots, Charts, Filings
- Sanderson Farms, Inc.(SAFM, Chart, Download SEC Filings)
- Archer Daniels Midland Company(ADM, Chart, Download SEC Filings)
- The Andersons, Inc.(ANDE, Chart, Download SEC Filings)
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