4 Food Firms To Feast On

Published in Investing on 25 July 2012

The pick of the food sector.

Perhaps it's not surprising that there are only three firms in the FTSE 100 (UKX) food producers sector. It's a business that has been rather neglected in this country: one reason why we have the lowest level of food security in Western Europe, according to a recent Economist Intelligence Unit report.

But for investors willing to look beyond food-to-fabric conditioner giant Unilever (LSE: ULVR), conglomerate Associated British Foods (LSE: ABF) and starch and sweetener specialist Tate & Lyle (LSE: TATE), there are some smaller companies that have proved popular and rewarding for private investors.

Fears that the world is facing a new food crisis following the worst US drought for 50 years underline the potential of the food and agribusiness sector globally. Companies that can position themselves well should enjoy a secure and prosperous future.

Sausage skins...

One company doing just that is sausage skin manufacturer Devro (LSE: DVO). With a market cap of £0.5bn, the company specialises in the manufacture of edible collagen from parts of animals that are probably best not thought of when tucking into your bangers and mash.

It serves a global market with sales roughly divided equally between Europe, the Americas and Asia-Pacific.

It has cleverly tapped into the demand for increased meat consumption in emerging markets, moving early into the Czech Republic to serve Eastern Europe and Russia, and developing sales in Latin America and China.

It is a fine example of specialisation, tapping into growing global demand where a high market share enables the firm to invest to increase efficiency and profitability.

... and sausages

A little smaller, Cranswick (LSE: CWK) processes the meat that goes inside the sausage skins, as the UK's leading supplier of sausages, bacon, fresh pork and similar products. With roots in the agricultural sector in East Yorkshire, it is now a major supplier to UK supermarkets.

That underlies its chief weakness. With two supermarket chains -- Tesco (LSE: TSCO) and Sainsbury (LSE: SBRY) -- each accounting for over a quarter of turnover, the company is squeezed in the food value chain in much the same way as milk producers are.

That was evident in the early part of last year, when a combination of rising global commodity prices and intransigent supermarket buyers forced the company to issue a profits warning.

Nevertheless, its significant role in the food supply chain supports its defensive qualities.

A little bit of everything...

The much smaller Carr's Milling Industries (LSE: CRM) has a surprisingly diverse business for a company with an £80m market cap. Its agricultural division, which accounts for about 70% of sales and profits, is one of the few direct UK plays on the agribusiness sector.

It sells farm machinery and supplies, and manufactures animal feed, with operations in the UK, US and Germany, although the UK accounts for over 90% of group sales. This is a sector where investment to increase the yield of the agricultural sector should reap rewards for companies such as Carr's, though the opportunities are perhaps more muted in the UK.

Its food division mills flour. That's an overcrowded sector where competition is tough. A third engineering division has a strong focus on the nuclear industry, and includes such diverse businesses as remote handling technology and fabrication of steel pressure vessels.

... and something more focused

AIM-listed Wynnstay (LSE: WYN) is a direct competitor. With a tad smaller market cap of £65m, it has a much tighter focus. Its main business is the supply of agricultural products such as animal feed, fertiliser and seeds in a concentrated geographic area including Wales, the Midlands and the North of England. There is also a retail operation aimed at farmers and pet owners.

That parochial feel is echoed in the shareholder list, half of which is made up of local farmers.

Valuation

 Share priceP/E (ttm)Div yield
Devro308p15.02.6%
Cranswick823p10.53.5%
Carr's Milling Industries887p10.13.1%
Wynnstay394p12.42.0%

Cranswick and Carr's Milling look relatively cheap at present, and all four shares merit a second look. The food sector -- at the larger and smaller ends -- is diverse, and companies within it need individual research.

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Further investment opportunities:

> Tony has shares in ABF and Unilever but no other shares mentioned in this article. The Motley Fool owns shares in Tesco.

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Comments

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shinygoldcar 25 Jul 2012 , 3:47pm

Good article. Thanks.

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