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February 27, 2006
The Not So Sunny Outlook in Scottsdale
It always good when I can escape from Chicago during the winter, especially after a weekend when the temperature lingers around "a" degree. So how could I say "no" to a week in Scottsdale, Arizona for the CAGNY (Consumer Analysts Group of New York) Conference--a big industry confab for consumer goods companies. Unfortunately, the outlook from the food CEOs last week wasn't nearly as sunny as the weather in the Southwest resort town.
The most recent earnings reports from many of the food manufacturers wasn't great, as I wrote about in a previous piece. And I wasn't that inspired from the outlook at the conference. Commodity pressures continue to weigh on these guys, particularly energy costs--which have moderated, but still remain high. And many of the big guys still continue to struggle to make interesting, innovative products that consumers are willing to pay up for. Although, I did find Kraft's South Beach ranch dressing rather tasty.
So what's an investor to do? Many of the stocks in the sector remain depressed. Sara Lee is down more than 20% from a year ago. Kraft at around $30 is about where it began trading back in 2001 after it was partially spun off from Altria. Tyson Foods is hovering near its 52-week low. The list goes on and on and on.
I say stick with the value plays and those companies that are truly innovating. As I've mentioned before Sara Lee seems to be one the deepest value plays in the group. And I was happy to learn at the conference that CEO Brenda Barnes remains committed to keeping the dividend payout at 40% to 50%--although in dollar terms it will come down as the company gets smaller. It'll be interesting to watch what Tyson Foods can do in the face of commodity pressures in beef. It's done a good job of becoming as ubiquitous in beef and pork as it was in chicken--if it can keep bringing value-added products to market, the company should do well once the commodity cycle turns. Investors should also look out for what happens to the industry when Kraft is fully spun out from cigarette maker Altria. CEO Roger Deromedi is confident investors will be attracted to the nation's biggest food makers. But I'm taking more of a "wait and see" attitude.
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