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- Don D., California
Can You Profit from America’s Ballooning Waistline
America’s waistline is ballooning at a rapid rate. At present, more than two-thirds of the country’s adult population is categorized as overweight. This is placing an enormous burden on the nation’s healthcare system, so the Obama Administration is trying to educate the public about the risks of packing on pounds, promote exercise among children and adolescents. The goal is ultimately to slim down U.S. citizens. Earlier this year, we wondered if you could get your portfolio in shape with health-related equities, and examined some promising companies in the anti-obesity space. However, if you believe in investing in broader trends, you may well be better off placing funds with the people behind KFC’s Double Down than in anti-obesity stalwarts. So, this month, we will take a look at the other side of the coin, and try to find some companies that stand to profit if average Americans, as well as many foreigners, are unwilling to change their habits.
The most obvious place to begin our search is in the fast food industry. From humble beginnings in the early 1920s, this sector has quickly become both a domestic and a global phenomenon. In the past decade or so, however, fast-food chains have come under fire from various consumer advocacy groups, government regulators, and medical societies due to issues like high caloric content, usage of trans fats, and portion sizes. Still, companies like Yum! Brands (YUM), owner and operator of KFC, Pizza Hut, Taco Bell, and other quick service restaurants, and McDonald’s (MCD - Free McDonald’s Stock Report) are thriving.
Yum! Brands’ U.S. businesses have struggled to meet internal goals (operating profit growth of 5% annually) in recent years, despite increased marketing efforts and the immense popularity of new products like the Double Down. The Chinese division, however, is expanding rapidly, easily posting double-digit profit gains. This is helping to offset any weakness on the domestic front. Too, the chain’s outlets are the go-to spot for many middle class Chinese citizens, so we think Yum! has lots of room to grow. On the down side, due to the high caloric content of the food, we expect there will be an onset of obesity in China (similar to ones seen in Europe and Japan). However, weight-management issues there may not become a concern for years to come, since Chinese tend to associate fatness with prosperity, wealth, and good fortune. We believe attractive growth opportunities exist in Brazil, India, and many parts of Europe, as well, so curious investors with a long-term bent should keep an eye out.
Like its counterpart, McDonald’s is also thriving in overseas markets. The recent global economic downturn, coupled with an innovative menu and considerable advertising muscle, has led to volume and market-share gains in just about every area of the world. The company’s Dollar Menu and Breakfast Dollar Menu and new beverages, including the McCafe offerings, are helping to generate top- and bottom-line growth on the home front, too. We expect these trends to continue for the foreseeable future. So, although MCD shares do not offer the type of long-term appreciation potential that YUM stock provides, we think they will continue inching higher over the course of the coming three to five years. McDonald’s stock is also a very safe bet in terms of volatility (low Beta and high Earnings Predictability); trades at a reasonable P/E ratio; and offers investors an above-average dividend yield.
Despite some bad press and potential government crackdowns on fatty foods, we think the fast food sector, as well as the rest of the Restaurant Industry, will continue expanding (along with the world’s collective waistline). It is a diverse group that offers many unique and interesting investment opportunities, so it is difficult to paint the industry with one brush. However, we think the slow and steady global economic recovery will boost sales moving forward, and there are lots of emerging markets that offer tremendous potential for the industry behemoths.
Other interesting investments lie in the Food Processing Industry. This sector has experienced steady growth over the past decade, or so, thanks to a combination of growing appetites, larger global footprints, and favorable population trends. Two of the fastest-growing segments within in the industry are confection and snacks, which are directly related to global obesity trends.
Results at Kraft Foods (KFT - Free Kraft Foods Stock Report), the largest food and beverage company headquartered in the United States, have been encouraging of late. Kraft’s core brands are performing well both at home and abroad, and we expect this trend to continue. That said, we think the company’s recent acquisition of Cadbury is what makes KFT shares stand out. Kraft has significantly raised its exposure to some of the faster-growing product categories (e.g., confection, snacks, and gum) within this sector. The positioning, coupled with considerable cost synergies and advances in emerging economies, should support healthy bottom-line growth over the long haul. Moreover, much like MCD shares, KFT stock has a low Beta and high Earnings Predictability; trades at a very reasonable P/E multiple; and has a well-above-average yield. So, we think this stock is well suited for conservative, buy-and-hold investors.
Another company we like in the Food Processing space is The Hershey Company (HSY). Despite recent global economic sluggishness, the chocolatier posted solid share-earnings results over the past year or so. We think more profit growth is on the horizon, thanks to the company’s ability to roll out new products and tweak existing offerings. The company is also investing heavily in streamlining and expanding its facilities in Pennsylvania, which should result in considerable cost savings three to five years hence. Finally, we like Hershey’s new promotional and advertising strategies. Management is investing more in cross-marketing opportunities that connect key products with high-profile events. The company is also using its advertising clout to tie its products to movies, like Iron Man 2, which should help the chocolatier reach a key demographic. Hershey stock is very similar to both KFT and MCD shares, in that it probably will not make any Average Joes or Janes millionaires over night. The equity is, however, very stable, and is an excellent buy-and-hold candidate. We might wait a bit for the price to come down, though, since HSY shares have been on a tear of late.
The next stop on this tour is the Beverage Industry. The Coca-Cola Company (KO - Free Coca-Cola Company Stock Report) and PepsiCo (PEP) are both well-known around the globe for their soft drink offerings. (Pepsi also has a line of snack foods marketed under familiar names, like Doritos, Ruffles, and Lay’s.) Recently, local governments in the United States and those in other parts of the world have been toying with the idea of implementing a soda tax, since government and university studies have proven that increased consumption of soda pop has led to weight gain in both adults and children. We doubt a relatively small tax on these products will change consumers’ habits, though, and expect these companies to continue reporting healthy share-net growth over the long haul. All told, these blue chip offerings will likely appeal to a broad range of investors, so we think interested parties should delve a bit deeper.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.