Cheap food trading at a cheap multiple / T. Boone's Crusade / Inflation Nation
Several weeks ago I mentioned an interesting tidbit that I picked up by looking at Kroger's (KR)outstanding earnings report (see post: It's amazing what one can learn by looking at the earnings of a grocery store). Sales of the chain's cheap generic aka private label products were up during the quarter. In its analysts' conference call the company's CEO specifically stated "We did see solid growth in Kroger corporate brand share in the first quarter," Safeway (SWY), which is getting absolutely crushed today reported something similar stating that it was experiencing “tremendous growth in our private-label products as consumers are looking for greater value in this economy.”
While I found this fact very interesting at the time, I filed it away in my brain for another day. This weekend that other day came. I came across a bullish article on just the sort of company that will benefit from consumers trading down in their grocery purchases. Ralcorp Holdings (RAH). Ralcorp is to generic food what Microsoft is to software and Google is to search. It dominates the segment. When it comes to off-label food, Ralcorp makes it, from soup to nuts…literally.
Ralcorp’s stock has seen some hard times lately (what company’s stock hasn’t), down 20% over the past quarter because investors are concerned rising input costs and about its pending acquisition of Post cereals. The company’s $2.6 billion acquisition of Post cereal from Kraft (KFT) is certainly a big gamble, it has caused quite a bit of dilution, but analysts believe that it will pay off. It will boost Ralcorp’s revenue by a whopping 50% and it should be accretive to earnings.
RAH currently trades at 12.6 times its estimated 2009 earnings, which is at the low end of the 13 to 59 P/E range that it has traded at over the past four years. Mr. Market certainly is not awarding companies high multiples these days, but other companies in Ralcorp.'s sector are being awarded higher multiples. On average companies in the packaged foods segment currently trade at 15.6 times earnings. As long as Ralcorp. executes well it appears to have significant upside.
I finally saw the new commercial that famous Texas oilman, turned alternative energy investor, T.Boone Pickens has been airing on television for the first time last night. For those of you who haven't seen it, here it is:
Now T. Boone may very well be a nice man in real life, I obviously don't know him personally, but I highly doubt that he paying big money to air these ads out of the goodness of his heart. Sure a lot of what he says makes sense, but why is he doing it? I suspect that he wants to profit by encouraging the U.S. public to pressure the government to invest more money in alternative energy and natural gas. This public pressure, when combined with the current high price of oil and the likely trifecta of a Democratic Congress, Senate, and President lead me to believe that big money is likely to be made over the next several years by investing in these areas. The one I like the best right now is natural gas. I expect that the U.S. will continue to use more and more of it as momentum increases for some sort of carbon tax or cap and trade legislation and environmentalists turn up the heat on coal. I am currently investing in E&P companies with significant exposure to nat gas as well as power companies that generate a large percentage of their electricity from sources other than coal, such as nuclear, natural gas, wind, and solar.
Sure the price of natural gas (and oil for that matter) has absolutely imploded over the past several weeks, but this strikes me as seasonal weakness more than anything. It is still trading at well above the level it was at a year ago. Furthermore, I suspect that investors who piled on when oil and gas were hot are now piling on when it is sliding (where are all the cries about those evil speculators when things fall off a cliff instead of go straight up). This might be a good time to accumulate nat gas stocks.
I got a good chuckle the other day when everyone freaked out when the government's reported CPI came in hotter than expected (see article: Inflation: Price jump worst since '91). Why did I find it so funny you ask? Because the government's reported CPI numbers don't even tell the half of it. If people weren't being lied to, they'd really freak out. Here's what inflation would look like right now if the governemnt was still using the methodology that it used back in 1983:
No position in any company mentioned