Week 222 - Food and Agriculture Companies: Brand Performance

Situation: How can we know whether a company is a “growth story”? Here at ITR, we depend on the fundamental performance of “metrics” from the previous 3 yrs, and the readout showing whether or not the company is moving ahead in terms of those metrics. The Barron’s 500 List provides that information, and also allows us to compare different companies within an industry. Usually, those findings correlate with the trend in “Tangible Book Value” or TBV, which Warren Buffett uses to identify companies with a Durable Competitive Advantage (see Week 158). Barron’s 500 data is more useful than TBV because it marks trends in Cash Flow and Return on Invested Capital (ROIC) regardless of a company’s degree of indebtedness, whereas, TBV is minimal or negative if a company is capitalized mainly by loans (which is unfortunately the case with most companies). 

Another key metric is Intangible Book Value. That’s the amount of money a company pays over and above TBV when it buys another company. Accountants book that asset as “Goodwill.” Intangible Book Value represents the dollar value of a company’s brand. It is difficult to place a dollar value on a brand unless a company is sold. But the information is so important that there are now 3 companies that compile the marketing data needed to make “best estimates.” One of those companies is Brand Finance, which recently came out with its 2015 ranking of the 500 most valuable brands worldwide. 

Here at ITR, we’re particularly interested in Food and Agriculture companies. Let’s see how those brands have performed, paying particular attention to companies that represent (or harbor) the top 7 growing brands: Coca-Cola (KO), PepsiCo (PEP), Nestle (NSRGY), Danone (DANOY), Diageo (DEO), Tyson Foods (TSN), and Kraft Heinz (KHC). This requires two spreadsheets. Table #1 ranks growing brands at the top of the table and declining brands at the bottom, assigning dollar values to each. Column D lists the parent company of each brand. Table #2 provides investment information for each of those 18 companies.

As an investor, you’re looking to find GARP (Growth at a Reasonable Price). Turning to Table #2, we see that all 18 companies beat the S&P 500 Index over the past 15 yrs (see Column C) and 16 yrs. 16-yr performance is measured by using statistical BMW Method data that is summarized in Columns L-N. So, growth is a foregone conclusion for these commodity-related stocks. That leaves two issues: 1) the price you pay for the stock relative to its operating earnings (EV/EBITDA in Column K); 2) the risk of loss that you take on by owning the stock (see Column D and Column N). Looking at the top 7 stocks with growing brands in Table #1, we see in Column K of Table #2 that Tyson Foods (TSN) is the only one that is not currently overpriced. With respect to the risk of loss, we see in Columns D & N of Table #2 that all except Coca-Cola (KO) and Pepsi (PEP) are overly risky, or carry currency risk because of not being priced in US dollars. For example, Nestle stock is priced in the world’s strongest currency: Swiss Francs.

Bottom Line: The value that comes from owning Food and Agriculture stocks ultimately depends on price trends for food commodities. That means these stocks will show greater price variance than the S&P 500 Index. However, food is a necessity and at least 10 million people a year emerge from poverty and can then afford to consume a 60 gm/d protein diet. So, we’re looking at risky investments that are remarkably rewarding if held over 2-3 market cycles; you have to be a “risk-on” investor to benefit from owning these stocks. The only exceptions are PepsiCo (PEP) and Coca-Cola (KO), which are sufficiently stable to be included in a retirement portfolio .

Risk Rating: 6/7

Full Disclosure: I own stock in KO, PEP, and DE.

Note: metrics highlighted in red denote underperformance vs. our key benchmark (VBINX); metrics are current for the Sunday of publication.

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