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Food: Defensive Distribution

04/22/2005 12:00 am EST


Neil George

Editor, Profitable Investing

One of the most defensive groups is food distribution," notes Ivan Martchev in Personal Finance. "This sector is about as stable and non-cyclical as you can get; institutional investors love to pile into these stocks in times of uncertainty." Here are three of his favorites.

"Sysco (SYY NYSE) is the #1 food distributor, accounting for around 13% of the market. Since its inception 30 years ago, the company has made 70 acquisitions. During the last five years, Sysco has been ‘digitizing’ its operations, creating economies of scale, and changing the company’s previous structure of a loose-knit association of semi-autonomous distributors. The system implementation has helped earnings, and more improvement is expected. It is also combining all its smallest distribution centers into large regional centers. Sysco’s main challenges are rising commodity prices for dairy and meat and its difficulty in passing these costs to customers. That said, Sysco is a solid company with a great management team; buy this excellent defensive holding below 37.

"Since its nearly fatal accounting scandal two years ago, Netherlands-based Ahold (AHO NYSE) has been doing serious housecleaning, trying to win back investor confidence. The stock was pummeled when it was discovered that the company’s US distribution operations were inflating profits. But after many firings, several cash infusions, and a successful restructuring plan, the stock is attractive again. Meanwhile, despite being beaten badly, Ahold still ranks fourth in size behind Wal-Mart, Carrefour of France, and Germany’s Metro in the world retailing charts. Large corporations that survive scandals tend to trade at a discount for awhile and then close over time. The healing process has started. Trading at 20% of sales, Ahold has the highest risk exposure of the trio, but it’s a good buy below 10.

"Although Supervalu (SVU NYSE) has a much bigger weighting in food retailing than food distribution its focus on the discount grocery business has kept it on the right side of the industry trend. Full service supermarkets have seen their pricing power erode and their market share stagnate, but the discounters have been doing well. Supervalu has had great success with Save-A-Lot, which is the nation’s leading extreme-value grocery chain with nearly 1,300 stores. The core idea: If you carry less of a variety of items, you can sell the ones you have much cheaper. Its comparable quality, private-label items sell at 40% below the leading national brands. Currently, Supervalu is the only way in the US to play the extreme-value trend. The stock is a buy under 33."

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