Food Producers Enter Lean Period

FOOD company stocks - which were among the most popular equities of the 1980s - are suddenly finding themselves out of "flavor" with many investors. The stock is seen as high-priced and the industry as intensely competitive.

Investors should buy food company stocks "with extreme prejudice," says David Goldman, an analyst with Oppenheimer & Co., an investment house. Industry growth has slowed. Profit margins are tight. There are still many promising companies, he says. But one should look for "unique" firms that have the potential for accelerated growth.

During the 1980s, packaged-food stocks were red-hot issues. The industry outperformed the broader stock market in every year except 1987, according to Walt Pearson, a vice president with J. & W. Seligman & Co., an investment house.

Food stocks also outperformed the market in 1990 and 1991. But during the first quarter of 1992 the industry has been sagging. Nonetheless, Mr. Pearson says the food industry should rebound and generate earnings growth of at least 12 percent. That's a solid number, but well below the 20 percent growth range of the mid-'80s. Much of the euphoria surrounding food companies during the 1980s was linked to the mergers and takeovers of that period. Pearson sees the next few years as "much tougher times for the

industry" to expand sales volume or profit margins.

One result, he says, will be a widening disparity between the dominant and most-profitable food companies, such as Philip Morris, and smaller, less profitable firms.

Philip Morris, which owns Kraft General Foods International (KGFI), is generally considered the premier United States food company. It has a wide range of products, dominant market share, and the potential for continued growth abroad. Pearson anticipates that Philip Morris will continue to post earnings growth in the 20 percent range. Looking at other major producers, he predicts that General Mills will post growth in the 15 percent range and Sara Lee, 13 to 14 percent.

Competition among the cereal companies underscores the growing disparity among food producers; both Kellogg and General Mills are not currently losing market shares, "but the No. 3, 4, and 5 players in the [cereal] industry are," Pearson says.

CPC International, Campbell Soup Company, Coca-Cola, and PepsiCo are also expected to do well over time, he says. The key to individual company growth, he reckons, will be "a good franchise overseas, a strong management team," and the ability to expand profit margins.

One challenge facing investors is the influence of the tobacco companies on the food sector. In addition to ethical considerations, there are legal challenges under way regarding the liability of the tobacco companies. Yet KGFI, owned by Philip Morris, is now the largest packaged-foods company in the US, and the fourth-largest in the world, behind Nestle, a Swiss company, Britain's Unilever, and France's BSN.

RJR Nabisco, also a US tobacco company, is the dominant producer of biscuit-cookie products in the US.

Agricultural companies with food links, such as Pioneer Hi-Bred International, Archer Daniels Midland, and Chiquita Brands International, are currently "underappreciated" by many investors, according to analysts John McMillin, S. Leigh Ferst, and Jane Shickich of Prudential Securities Inc. These companies have the potential for sales growth abroad.

Finally, the same situation of the "rich getting richer, the poor getting poorer" that has marked the packaged-food industry of late is also occurring on the retail side of the food business. The outlook for the sales and profits of food retailers is not considered stellar right now compared with other industries. Grocery chains that have been gaining market share are expected to continue to do so, at the expense of rivals.

Among retailers, Prudential analysts George Thompson and Susan Kaupie currently like Hannaford Bros. of the Northeast and Albertson's, which covers 17 states in the West and South.