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Stock Ideas Investors Daily Edge Food Fight ! Cheaper Corn, Higher Oil
Stock Ideas Investors Daily Edge Food Fight ! Cheaper Corn, Higher Oil 
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| Food Fight ! Cheaper Corn, Higher Oil |
| Thursday, 24 July 2008 | |||||||||
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By Lynn Carpenter As an example of how the improving net margin separates winning companies from those getting along OK or worse, there’s no better place to look than the food companies. For many of them, the soaring costs of corn, wheat and oil have raised their costs painfully. The cereal makers intend to raise prices again, which may result in more dollars to the sales column of future earnings reports, but not necessarily to better earnings or, most importantly, better profitability. Quarterly reports have millions, billions and thousands dancing across the charts of financial results, footnotes, interpretations…. But the basic idea is simple: If you made 1,000 boxes of granola in your kitchen at a cost of $3 a box and sold them for $5 a box, you’re doing nicely. If your ingredients and fuel suddenly raise your cost to $4 a box, your profit margin is 50% lower. Now raise your selling price to offset that dollar increase in costs that you anticipate. Add a little extra for good measure, you’ll price your granola at $6.50 a box. And by the way, those two teenagers and the part time driver that are helping out still get paid… they’re costing you 50 cents a box. Next quarter, you count up sales dollars and find they’ve soared 20%. A year ago, you sold $1250 worth of granola in the same quarter. Now you’ve jumped to $1,500. Break out the Cold Duck. But wait… when you look beyond the higher dollar sales intake, you discover things are not so good. That 20% increase in sales came on only 230 boxes of granola compared to 250 last year in the same quarter. What’s more, that 50-cent a box cost for labor increases to a 55 cents per box clip. And you miscalculated the impact of fuel. You thought it would go up 50%, not that it would double. Now, despite “better” sales, you’re running on a much thinner margin. And then Jane down the street gets into the business, and she’s offering her wares at $6 a box.
This is what is happening in the food business right now. Many are battling rising input costs and tough competition. But few are actually benefiting from events and price trends. The telltale difference is in who’s merely holding on against pressure and who’s advancing in how profit margins hold up. For instance, Kraft was a hot stock for a while after Altria spun it off. But from an 8.6% average net profit margin over the past five years, it dropped to 7.2% last year. And in its most recent report, that margin was down to 5.8%. That drop came despite the illusion that all was well because sales rose 8.4% from FY 2006 to FY 2007. Profit margin in 2008 will be lower still if the early quarters’ trend wins out. In contrast, Hormel reported a 17% improvement in its net profits from a year ago, thanks to lower pork prices and a newfound love among cash-strapped families for its iconic product—Spam. Of course, if you’re talking turkey—that might be a problem next quarter, but probably not enough to turn Hormel’s trend the wrong way. That’s the kind of trend you are looking for. This sort of information is in the companies’ press releases, including those issued through Business Newswire. I used food companies as an example because we all understand that business easily. And this is just a cursory glance, an example of the kind of information you want to see. But it’s not too hard. Just let those press releases come to you. Skip the headlines and check what they say about how profit margins are doing. You are bound to find some companies that will emerge from this bear market and this shaky economy ahead of others. Good luck, and here’s to Spam in a can. P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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