Food for Thought

08/13/2004 12:00 am EST

Focus:

Ivan Martchev

Editor, Vital Resource Investor and Global Viewpoints

"Many investors are now searching for safety," says Ivan Martchev, associate editor of Personal Finance and editor of Wall Street Winners. "And some of the best defensive investments are food companies with their remarkably reliable revenue streams."

"The biggest and most diversified food company in the world, product-wise and geographically, is Switzerland-based Nestle (NSRGY Other OTC). With $70 billion in sales and operations in every major developed and developing market, few companies have the reach that Nestle does. Nestle's conservative success story is different from most multinational consumer franchises. While most bring their products to foreign markets and then throw in a few local products, Nestle studies local tastes and focuses on local products. This strategy takes longer to pay off; but when successful, the effort bears fruit for decades. The stability of Nestle 's earnings and revenues has helped it achieve the highest AAA credit rating, which few corporations have. The stock trades at about 20 times earnings with long-term earnings growth of 15%. This is a long haul stock and is a great buy on any persistent stock market weakness..

"The other industry titan is Kraft (
KFT NYSE), the biggest food company in the US with annual sales of $32 billion. Kraft doesn't have the global reach that Nestle does, although the company has recognized that deficit in its strategy and has started to make targeted acquisitions to diversify internationally. Actually, the fastest growing part of the company is its international division, with sales to Europe and the Middle East growing at a 32% annual clip, even though they represent just over 20% of Kraft's sales. In the US, the company is a much steadier grower. But ever since the spin off from Altria (formerly Philip Morris), Kraft has worked to invigorate and diversify itself. That will clearly be beneficial to stockholders during the next five years. The shares are valued at 16 times earnings, and as the company works to increase its growth rate both domestically and internationally, the shares could rise substantially from current levels. Buy Kraft up to 32.

"Chewing gum maker W.W. Wrigley (WWY
NYSE) isn't cheap, selling at over 25 times earnings. But there's a reason why investors have paid a premium for this stock: It has no debt and superior operating margins of 21% with return on equity of almost 27%. This is the type of stock you load up on when the market is down hard, because Wrigley has proven with remarkable consistency over the decades that it knows how to grow its business and remain the undisputed leader. Wrigley's has excellent brand recognition and has become an entrenched product in all major world markets. The stock is a bit toppy here, but companies like this are very hard to find and its price reflects that fact. Buy Wrigley at current prices or more enthusiastically on pullbacks.

"And last, Ahold (AHO NYSE) is very much unlike our three industry leaders. It has the status of a fallen angel. Netherlands-based Ahold is among the biggest retailers in the world with annual sales of $68 billion and a primary focus on supermarkets and food distribution. The company fell on hard times in early 2003 when an accounting scandal at its US distribution division caused a crisis of confidence. Ahold is now capitalized only at 11% of its annual sales because of its past problems. This strikes us as a case of throwing the baby out with the bath water. The whole conglomerate was penalized severely for the problems of one division. As with all turnaround situations, be patient and be willing to accept more risk for the higher possible reward down the road. Buy Ahold up to 7.50."

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