Situation: Food and water are essential goods. Growth of the Food & Agriculture industry should merely reflect population growth. But the availability of clean water and a 55 gram/day protein diet actually reflects Middle Class population growth. So decrease in poverty is the true measure of growth. Given that global poverty has decreased almost 4+%/yr over the last 30 years, Food & Agriculture is a recession-resistant growth industry that demands investor attention.
Mission: Analyze 14 Food & Agriculture companies that I think you might want to consider.
Execution: See Table.
Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number. Three companies (HSY, PEP, GIS) meet that standard. His second point -- that the company is “run by able and honest managers” -- is addressed in Morningstar reports (see Column AL) and is negatively impacted by the degree to which managers and directors choose to capitalize their company by issuing long-term bonds rather than common stock (see Column T). No company has a BUY rating from Morningstar but one is considered undervalued (GIS), Six companies have a Long-Term Debt to Equity ratio that is less than 1.0 (HRL, COST, TGT, ADM, MDLZ, WMT). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Six companies (COST, UNP, DE, TGT, KR, WMT) have Retained Earnings, meaning some Free Cash Flow is left after dividends have been paid. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-year and 3-5 year Forward PEG ratios (see Columns M and N): Three companies have estimated PEG ratios at both time points that are no higher than 2.0 (UNP, DE, CAT). I favor companies in The 2 and 8 Club, meaning A-rated companies that have grown their dividend at least 8%/yr for the past 5 years (see Column J). Seven companies meet that standard (HRL, COST, UNP, DE, TGT, KR, MDLZ). Five stocks are A-rated (HRL, TGT, ADM, HSY, PEP). Note in this analysis that I’ve cited 5 companies at least 3 times: HRL, COST, UNP, DE, TGT.
Bottom Line: Companies that depend on the production of raw commodities are inherently risky. Half of those on this list have a greater risk of loss than SPY, the S&P Index ETF (see red highlights in Column Q). Only two of the remaining 7 are A-rated (HRL and PEP) and only PEP is less risky than the SPDR Dow Jones Industrial Average ETF (DIA), an A-rated ETF.
Risk Rating: 7 (10-yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-average into COST, UNP, WMT and CAT, and also own shares of KO and DE.
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