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FTSE 350 Outlook: Food producers

Created:
24 January 2008
Written by:
Nathalie Olof-Ors

Big swings in consumer trends are quite unusual in the food industry. So the gradual move towards healthier and more upmarket products over the last five years is unlikely to be affected by weaker consumer spending. Indeed, most households may pay more attention to promotions, but will probably maintain a few indulgences on their weekly grocery shopping list, at the time when they are reducing their budgets elsewhere.

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In 2007, the food industry experienced an unprecedented change with the sharp rise of soft commodities' prices. Futures contracts on grains, dairy products as well as meat and vegetables have soared as a result of a fast-growing demand from emerging markets and the rapid developments of biofuels. And while a correction can never be entirely ruled out in such a volatile market, this scenario seems unlikely given the strong imbalance between supply and demand. In fact, food manufacturers face a second wave of inflation during the first half after the US department of Agriculture flagged last December that grain stocks are at a historical low.

So, in 2008, this should again favour the largest players in the sector. Like Swiss group Nestle, Unilever managed to pass most of these raw material costs increases to customers , as the group sits on a portfolio of strong brands and is - given its scale - in a strong position to negotiate with retailers. Admittedly, its shares trade at a significant premium to its peer group, but investors will probably be willing to pay more for a share which retains defensive qualities when the outlook for the market is so uncertain.

By contrast, investors should be more cautious on the smaller food manufacturers, like Dairy Crest, Premier Foods and Northern Foods. Last year, food inflation took a big bite out of these companies' profits as they have either struggled to recover higher costs or lost market share as a result of price increases. Still, even after a sharp share price derating, leading some analysts to call them 'bargains', they are not massively undervalued since they now trade in the region of 12 times earnings, which is historically the normal multiple for the sector. And with further cost pressures ahead, it is certainly too early to bottom fish.

Company name Price (p) Mkt val. (£m) P/E ratio Div. yld (%) 12M price chng.(%) Last IC view
ASSOCIATED BRIT.FOODS 844.5 6,686 16 2.31 3.11 Buy, 886p, 06 Nov 2007
CADBURY SCHWEPPES 576 12,149 19.1 2.59 3.23 Sell, 631p, 11 Dec 2007
DAIRY CREST 524 694 9.9 4.45 -23.39 Good Value, 587p, 9 Nov 2007
NORTHERN FOODS 86.25 424 11.8 4.99 -26.12 Fairly Priced, 100p, 13 Nov 2007
PREMIER FOODS 130 1,098 7.3 5.27 -59.38 Buy, 209p, 13 Nov 2007
TATE & LYLE 472.25 2,180 9.7 4.55 -34.41 High Enough, 434p, 06 Nov 2007
UNILEVER (UK) 1637 21,258 17.2 2.91 17.01 Good Value, 1559p, 03 Aug 2007

MORE FTSE 350 OUTLOOK SECTORS:

See also:

Pharmaceuticals & healthcare

Pubs

Transport

Real estate

For a full table of contents for the FTSE 350 Outlook series, click here.

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