Packaged Food Sector Update

www.jpmorganmarkets.
com
North America Equity Research
17 September 2013
Equity Ratings and Price Targets
Mkt Cap Rating Price Target
Company Ticker ($ mn) Price ($) Cur Prev Cur Prev
Annie's, Inc. BNNY US 822.45 46.73 N n/c 52.00 44.00
Campbell Soup Company CPB US 13,402.76 42.28 UW n/c 38.00 40.00
ConAgra Foods CAG US 13,590.44 31.88 N OW 34.00 36.00
General Mills GIS US 32,761.10 49.25 N n/c 50.00 52.00
Hain Celestial Group HAIN US 3,854.31 79.40 OW n/c 94.00 86.00
Hershey HSY US 20,774.01 91.58 OW n/c 105.00 100.00
Hillshire Brands HSH US 3,957.50 31.66 OW n/c 35.00 37.00
J.M. Smucker Co. SJM US 11,431.48 107.87 OW n/c 118.00 115.00
Kellogg K US 22,254.88 60.64 UW N 58.00 65.00
Kraft Foods Group KRFT US 32,381.28 54.24 N n/c 57.00 59.00
McCormick & Co., Inc. MKC US 9,056.74 67.79 N n/c 70.00 69.00
Mead Johnson Nutrition MJN US 15,370.05 75.64 OW N 88.00 78.00
WhiteWave Foods WWAV US 3,415.91 19.73 OW n/c 24.00 22.00
Mondelz International, Inc. MDLZ US 56,884.65 31.55 OW n/c 38.00 35.00
TreeHouse Foods Inc. THS US 2,588.45 69.26 N n/c 76.00 74.00
Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 13 Sep 13.
Packaged Food Sector Update -
Go Where the Growth Is
Upgrading MJN to Overweight, Downgrading CAG to
Neutral and K to Underweight
Food Manufacturing and Retail
Ken Goldman
AC
(1-212) 622-0359
ken.goldman@jpmorgan.com
Bloomberg JPMA GOLDMAN <GO>
J.P. Morgan Securities LLC
See page 65 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
In this note, we refresh our outlook on the US packaged food sector and highlight our
top picks. We recommend investors gravitate toward names that can buck the groups
sluggish sales trend, which we think will continue. We favor stocks less tethered to
dividend yields (we think the bond proxy trade has more room to reverse), and we
favor names with larger exposures to Europe and China. Though many food
companies will likely benefit from lower costs, we place less value on margins, as we
think margin growth not only will be fleeting but weighted less heavily by investors.
In this context, we recommend Overweight-rated WWAV, MDLZ, HAIN, MJN
(upgrading MJN to OW) and HSY. We are more cautious on Underweight-rated CPB
and K (downgrading K to UW), for which we think consensus revenue numbers are at
risk. Finally, after further reviews of our model, we are downgrading CAG to Neutral,
as we think a) earnings are more in jeopardy than we previously believed and b) upside
from the Ralcorp integration has become less important than concerns regarding sales.
Top picks: WWAV, MDLZ, HAIN, MJN and HSY. In this note, we rank our
stocks in order of potential total shareholder return between now and the end of
2014. In order, and with more regard for the long-term opportunity than possible
short-term hiccups, we prefer: 1) WWAV, 2) MDLZ (though we are concerned
about 3Q13E EPS), 3) HAIN, 4) MJN, 5) HSY, 6) HSH, 7) SJM, 8) CAG, 9) KRFT,
10) BNNY, 11) THS, 12) MKC, 13) GIS, 14) K, and 15) CPB.
We are not bullish on packaged food as a sector today. The group remains
expensive versus the SPX and other consumer staples sectors (Figures 3-4). Though
food generally underperforms the SPX when its average dividend yield slips versus
Treasury yields, the opposite has been true of late (Figure 10). We do not expect
outperformance to continue in a less attractive environment for dividend yields, and
overall, we would not be surprised if multiples across traditional packaged food
started to slip. We therefore lower our valuation multiples across the group today.
This document is being provided for the exclusive use of VINEET PRASAD at CONCORDIA UNIVERSITY
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We recommend buying food companies that possess a rare asset today:
solid sales growth. Before the recession, organic sales in packaged food grew
around 5% to 6% per year. Since, the figure has been closer to 3% and has been
sequentially dropping of late (Figure 5). We think this trend will continue as
lower inflation incents companies to effectively lower prices (unfortunately
without a resulting big pop in volumes). The last time pricing approached 0%,
in 2010, volumes remained in the low single digit range (Figure 7), and we
think this will take place again. As we have opined previously, we do not believe
the group will outperform as a whole without sales growth. In this type of
environment, we recommend placing extra value on companies with the
potential to buck the trend, including WWAV, MDLZ, HAIN, MJN, and HSY
all Overweight-rated. See figure 4.
We recommend buying food stocks less tethered to dividend yields. Food
stocks historically have performed relatively poorly when their dividend yields
lose steam versus Treasury yields. Right now, however, despite the average food
stocks yield being lower versus Treasuries than any time since May 2011
(Figure 9), the group has outperformed (Figure 10). We do not think this
outperformance is likely to continue, as investors can find similar yields in less
risky assets. In this climate, we might lean toward stocks that rely less on
dividends as a part of their total shareholder return profile, including WWAV,
HAIN, MDLZ, MJN, HSH, HSY, BNNY and THS all Overweight-rated
except BNNY and THS (Neutral). See Figure 11.
With Europe and China expected to perform well, we lean toward names
exposed to these regions. Per Bloomberg consensus estimates, GDP is
expected to increase in Europe to 1.0% in 2014E from -0.4% in 2013E. This is a
1.4% difference, greater than that expected in the US. In addition, while US
consumer confidence has risen, in Europe it has done so at a steadier and steeper
pace (Figure 12). Partially as a result, interest in stocks with European exposure
has risen, as per J.P. Morgan Chief US Equity Strategist Tom Lee (link), as well
as our own observations. Regarding China, J.P. Morgan Asian Equity and
Emerging Market Strategist Michael Yu recently said the economy is picking
up momentum (link), and we are seeing investor interest in China-exposed
food companies start to heat up again. We believe these trends should favor
MDLZ, MJN, MKC, WWAV (more EU exposure than sometimes perceived),
and HSY (growing quickly in China with the ability to leverage a growing sales
force). These same trends should disfavor US-centric companies such as CAG,
HSH, KRFT, SJM, and THS, all Neutral-rated except HSH (OW).
We expect industry gross margins to rise but then flatten out relatively
quickly. And investors care less about margins than volumes. The strongest
tailwind for packaged food stocks over the coming months is likely to be from
input costs, which should be muted or down for many companies we cover. This
should lead to higher gross margins (Figure 13). Based on our analysis of
historical trends, however, we do not think margins will rise for an extended
period, maybe two or three quarters. More importantly, our analysis suggests
food investors do not value margin growth particularly highly, as evidenced by
the relatively low correlation over time between margin growth and food stock
price performance (Figure 14).
We expect the food companies to promote more heavily but less efficiently.
The percentage sales lift from promotions has been dropping lately, which
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Ken Goldman
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suggests that lower prices may not be resulting in better overall top lines (Figure
8).
Safer to go back into the water: Short interest still below the norm and now
at multi-year lows. Packaged food short interest as a percentage of the float
now stands at 3.4% on average, below the 10-year average of 4.1%. This is a
multi-year low and is down nearly 6% Y/Y (Figure 15). Stocks with particularly
low short interest as of last measure include Neutral-rated CAG, GIS, KRFT,
and THS; and Overweight-rated MJN, MDLZ, and SJM (Figure 16). We see
low short interest as a relatively bearish indicator, as it suggests there will be
less of a positive stock reaction if short covering takes place.
Mead Johnson (MJN): Upgrading to Overweight from Neutral. We believe
today, when analyzing MJN, the companys top line growth should be valued
more highly than the pending cost headwinds and the possibility of further
Chinese government intervention. With relatively easy comparisons
approaching, cash flow set to rise in a year because of less capital spending, the
possibility of China easing its one baby policy, slightly better birth rates in the
US, and the company perhaps suggesting a more aggressive stock buyback to
come, we think the EPS and EBITDA growth opportunity is stronger for MJN
than at any time in the last year. We raise 2014E to $3.64 from $3.56 (consensus
$3.56) and introduce 2015E at $4.08 (consensus $3.93). We establish a
December 2014 price target of $88; our previous December 2013 target was
$78.
Kellogg (K): Downgrading to Underweight from Neutral. We recommend
investors exhibit a level of caution with Kellogg. Because of our top line
concerns, we are lowering 2013E to a Street-low $3.71 from $3.75 (consensus
$3.79), and 2014E to $4.00 from $4.02 (consensus $4.09). We observe the
particularly difficult comparison approaching in 4Q13E. Our concern derives
from slumping trends in Nielsen Co. xAOC-tracked channels, which we think
could cause the company to report lower-than-expected earnings. We establish a
$65. We expect some pushback on this call, as K already has fallen 11% in the
last month (SPX flat). But the group as a whole has not performed much better
(-3% median over the last month) and Ks short interest ratio is well off its
summer peak. K may not have enough downside juice left to be a strong
absolute short, but on a relative basis we might pair it against other names we
prefer.
ConAgra (CAG) Downgrading to Neutral after further review of model.
Last week, we maintained our Overweight rating (link) following the company's
negative pre-announcement. We then maintained it again after uncovering some
Nielsen-related data points we interpreted as less than positive (link). But today
we are capitulating, as we are lowering our numbers following a review of our
model. We are starting to think consensus estimates contain downside risk:
FY14E goes to $2.30 from $2.34 (consensus $2.37) and FY15E to $2.58 from
$2.65 (consensus $2.65). And though we continue to see upside to guidance
from cost synergies, we now think this is less important than the possibility that
CAGs sales disappoint for more than a quarter or two. As mentioned above, we
think investors will favor better top lines for a while, an environment that does
not necessarily favor ConAgra today. We also note the large amount of
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Ken Goldman
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uncertainty regarding this company at the moment, including the exact reasons
for the 1Q miss, the duration of the challenges, the potential for Ralcorp to
recover, the impact of the loss of the potato business, the impact of the
divestiture of the milling business, the potential for both top and bottom line
synergies from Ralcorp, and the pace of debt paydowns. We establish a
$36.
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Table of Contents
Expected Total Shareholder Returns......................................6
Sector Outlook..........................................................................7
Annie's, Inc. ............................................................................17
Campbell Soup Company......................................................19
ConAgra Foods.......................................................................21
General Mills...........................................................................23
Hain Celestial Group..............................................................25
Hershey ...................................................................................27
Hillshire Brands......................................................................29
J.M. Smucker Co.....................................................................31
Kellogg ....................................................................................33
Kraft Foods Group..................................................................37
McCormick & Co., Inc.............................................................39
Mead Johnson Nutrition ........................................................41
Mondelz International, Inc. ..................................................43
TreeHouse Foods Inc. ............................................................46
WhiteWave Foods...................................................................48
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Expected Total Shareholder Returns
Figure 1: We expect the following shareholder returns between now and December 2014
Source: Company reports, Bloomberg and J.P. Morgan estimates.
JPM
Rating
Expected Stock
Appreciation: Thru End
of CY14 (JPM Est.)
Expected Dividend Yield:
Thru End of CY14 (per
Bloomberg)
Expected Total
Shareholder Return: Thru
end of CY14
WWAV OW 21.6% 0.0% 21.6%
MDLZ OW 19.3% 2.2% 21.5%
HAIN OW 18.4% 0.0% 18.4%
MJN OW 15.6% 2.4% 18.1%
HSY OW 13.3% 2.8% 16.0%
HSH OW 10.5% 2.9% 15.8%
SJM OW 9.3% 2.7% 12.1%
CAG N 6.0% 4.3% 10.2%
KRFT N 4.0% 5.8% 9.8%
BNNY N 9.8% 0.0% 9.8%
THS N 8.9% 0.0% 8.9%
MKC N 3.3% 3.4% 6.6%
GIS N 0.5% 3.9% 4.5%
K UW -4.9% 3.8% -1.0%
CPB UW -10.4% 4.4% -6.0%
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Sector Outlook
Packaged food as a whole remains expensive versus the
SPX and other consumer staples sectors
Figure 2: Packaged food remains very expensive versus the SPX
Source: Bloomberg and J.P. Morgan.
Figure 3: Food remains slightly expensive versus beverages
For this reason, and because we do not think sales will be strong over the next year or
so, we are not necessarily positive on the group at this time.
We currently favor packaged food stocks with the following qualities: 1) superior
sales growth, 2) exposure to Europe and/or China, and 3) a relatively large
percentage of total shareholder return from stock price growth rather than dividend
yield.
We recommend buying food companies that possess a rare
asset today: solid sales growth
As we have opined previously, we do not believe the group will outperform as a
whole without sales and especially volume growth. In todays low revenue growth
environment, we recommend placing extra value on companies with the potential to
buck the trend, including WWAV, MDLZ, HAIN, MJN and HSY. These are some of
the companies we expect to have the highest growth rates over the next 12 months:
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Figure 4: We generally are recommending food stocks we think will exhibit strong organic top line growth over the next four quarters
Source: J.P. Morgan estimates.
Before the recession, organic sales in packaged food grew around 5-6% per year.
Since, the figure has been closer to 3% and sequentially dropping lately.
Figure 5: Packaged food sales growth has struggled since the recession began
Source: Company reports and J.P. Morgan. Median organic sales growth (volume + price + mix) among CPB, CAG, GIS, HSY,
HSH, K, KRFT, KFT, MKC, MJN, MDLZ, SJM, THS, and WWAV.
We think this trend will continue as lower inflation incents companies to effectively
lower prices. We are confident food companies will lower prices either via list price
decreases or, more likely, higher promotions. Over time, the Food PPI has been
+79% correlated with the J.P. Morgan Raw Foodstuffs Index, and the Raw
Foodstuffs Index is about to head into negative territory, in our opinion (meaning
packaged food prices are likely to follow):
NTM Organic Sales Growth JPM Rating Notes
BNNY 19.8% N Neutral on valuation and belief org. growth will temporarily decelerate
MJN 9.3% OW Easing comps approaching
WWAV 8.9% OW Growth could accelerate in '14 if center store products work
HAIN 8.3% OW Acquisitions usually add a significant amount, too
HSY 7.3% OW Higher cocoa prices eventually will boost pricing (not much elasticity)
MDLZ 5.4% OW Should LT guidance be 4-6% instead of 5-7%? Either way, it's strong
MKC 4.3% N We like MKC but valuation is full
KRFT 3.3% N Helped by lapping trade de-load; normal rate is closer to 2.0-2.5%
HSH 2.3% OW OW but not among our top OW picks at the moment
GIS 2.2% N Still held back by Greek yogurt
THS 2.1% N Growth could be at risk if price gaps vs. brands shrink
K 2.1% UW Keebler needs to turn around; was it neglected a bit during Pringles integration?
CPB 0.9% UW Guidance is 2-3%; this seems aggressive to us given tough comps
SJM -1.2% OW Sales impaired by pass-through coffee pricing
CAG -3.7% N We assume 1Q14's struggles continue throughout the fiscal year
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Figure 6: We expect packaged food companies to lower their prices. Raw food prices are
falling, and over time they have been highly correlated with Food PPI (packaged food
company pricing, largely)
Source: Bloomberg and J.P. Morgan estimates.
Will lower prices spark higher volumes? Perhaps a bit. But the last time pricing
approached 0%, in 2010, volumes remained in the low single digit range, and we
think this will take place again:
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Figure 7: The last time pricing got to 0% Y/Y in the group, volumes stayed low (and have not
been much above 2% in any period since). We have no reason to think this time will be
different
Source: Company reports and J.P. Morgan. Note: Median volume and price data among CPB, CAG, GIS, HSY, HSH, K, KRFT,
KFT, MKC, MJN, MDLZ, SJM, THS, and WWAV. Some companies include mix with volume, some with price.
If companies do promote more heavily, we do not expect a meaningful dollar lift
from their actions. Sales lifts in dry grocery from promotions have been soft lately:
Figure 8: Higher promotions may not be very effective right now; dollar sales lifts from
promotions across dry grocery have been weakening
Source: The Nielsen Co. xAOC and J.P. Morgan.
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We recommend buying food stocks less tethered to
dividend yields
Right now, the average food stocks yield is 0.43% less than the 10-Year Note yield,
the lowest figure since May 2011:
Figure 9: The average food stocks yield is 0.43% less than the 10-Year Note yield, the lowest
figure since May 2011
Food stocks generally perform relatively well when their dividend yields are
attractive versus Treasuries (+50% correlation over time). Lately, however, they have
performed well even as their relative yield has fallen. We do not expect this trend to
continue, and if relative yields drop further, food stocks may underperform:
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12
17 September 2013
Ken Goldman
(1-212) 622-0359
Figure 10: Food stocks generally perform relatively well when their dividend yields are attractive
versus Treasuries, but this has not been true lately. We might expect food stocks to start
underperforming if relative yields continue to slip
Source: Bloomberg and J.P. Morgan. Note: As of 9/13/13.
On the one hand, this makes attractive dividend yields scarce, which could favor the
highest yielding names such as KRFT. On the other hand, we think portfolio
managers seeking steady returns may look at food in general as a less attractive
sector than it was a few months ago, which could drive investable assets out of the
group as a whole. In this climate, we tend to lean toward stocks that rely less on
dividends as a part of their total shareholder return profile, including WWAV, HAIN
and MDLZ (see below):
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Divergence
13
17 September 2013
Ken Goldman
(1-212) 622-0359
Figure 11: In a climate where dividend yield may be less important, we lean toward stocks that rely less on dividends as a part of their total
shareholder return profile
Source: J.P. Morgan estimates.
With Europe and China expected to perform well, we lean
toward the names exposed to these regions
Per Bloomberg consensus estimates, GDP is expected to increase in Europe to 1.0%
in 2014E from -0.4% in 2013E. This is a 1.4% difference, greater than the increase
expected in the US (+1.6% in 13E, +2.65% in 14E). In addition, while US
consumer confidence has risen, in Europe it has done so at a steadier and steeper
pace:
Figure 12: European consumer confidence has been on a steady upswing, perhaps favoring food
companies that sell relatively large amounts of product into the Continent
Source: Bloomberg.
JPM
Rating
Expected Stock
Appreciation: Thru End
of CY14 (JPM Est.)
Expected Dividend Yield:
Thru End of CY14 (per
Bloomberg)
Expected Total
Shareholder Return: Thru
end of CY14
% of TSR from Stock
Appreciation
% of TSR from
Dividends
BNNY N 9.8% 0.0% 9.8% 100.0% 0.0%
WWAV OW 21.6% 0.0% 21.6% 100.0% 0.0%
HAIN OW 18.4% 0.0% 18.4% 100.0% 0.0%
THS N 8.9% 0.0% 8.9% 100.0% 0.0%
MDLZ OW 19.3% 2.2% 21.5% 89.8% 10.2%
MJN OW 15.6% 2.4% 18.1% 86.5% 13.5%
HSY OW 13.3% 2.8% 16.0% 82.8% 17.2%
HSH OW 10.5% 2.9% 15.8% 67.0% 18.5%
SJM OW 9.3% 2.7% 12.1% 77.3% 22.7%
CAG N 6.0% 4.3% 10.2% 58.2% 41.8%
MKC N 3.3% 3.4% 6.6% 49.2% 50.8%
KRFT N 4.0% 5.8% 9.8% 41.2% 58.8%
GIS N 0.5% 3.9% 4.5% 12.1% 87.9%
K UW -4.9% 3.8% -1.0% N/M N/M
CPB UW -10.4% 4.4% -6.0% N/M N/M
14
17 September 2013
Ken Goldman
(1-212) 622-0359
Partially as a result, interest in stocks with European exposure has risen, as per J.P.
Morgan Chief US Equity Strategist Tom Lee (link), as well as our own observations.
Regarding China, J.P. Morgan Asian Equity and Emerging Market Strategist Michael
Yu recently said the economy is picking up momentum (link), and we are seeing
investor interest in China-exposed food companies start to heat up again.
These trends should favor MDLZ, MJN, MKC, WWAV (more EU exposure than
sometimes perceived), and HSY (growing very quickly in China). They should
disfavor US-centric companies such as CAG, HSH, KRFT, SJM, and THS.
We expect industry gross margins to rise but then flatten
out relatively quickly. Also, food investors care more about
volumes than margins, per our data
The strongest tailwind for packaged food stocks over the coming months is likely to
be from input costs, which should be muted or down for many companies we cover.
This should lead to higher gross margins:
Figure 13: We expect lower costs to lead to higher gross margins for packaged food stocks in the
near future
Source: Bloomberg and J.P. Morgan. Gross margin = Food PPI - J.P. Morgan Raw Foodstuff Index. Data after July 2013 are estimated
by JPM.
Based on our analysis of historical trends, however, we do not think margins will rise
for an extended period, maybe three quarters at most. And then, as Figure 13 above
illustrates, they likely will fall again before long (perhaps in mid-to-late 2014, if
history is a guide).
More importantly, our analysis suggests food investors do not value margin growth
particularly highly, as evidenced by the relatively low correlation over time between
margins and food stock price performance.
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15
17 September 2013
Ken Goldman
(1-212) 622-0359
Figure 14: Food stocks have been more correlated with sales volumes than pricing or changes in
gross margin
correlation with food stock prices, last seven years
Safer to go back into the water: Short interest is still well
below the norm, near a 7-year low
Packaged food short interest as a percentage of the float now stands at 3.4% on
average, below the 10-year average of 4.1%. This is a multi-year low and down
nearly 6% Y/Y.
Figure 15: Short interest as a percentage of the float remains low in food
72%
18%
22%
Sales Volume Pricing Gross Margin
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16
17 September 2013
Ken Goldman
(1-212) 622-0359
We see low short interest as a relatively bearish indicator, as it suggests there will be
less of a positive stock reaction if short covering takes place. Stocks with particularly
low short interest as of last measure include KRFT, MDLZ and CAG:
Figure 16: Short interest as a percentage of float
0.7% 0.8%
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17
17 September 2013
Ken Goldman
(1-212) 622-0359
Annie's, Inc.
Neutral
Company Data
Price ($) 46.73
Date Of Price 13 Sep 13
52-week Range ($) 48.85-32.06
Market Cap ($ mn) 822.45
Fiscal Year End Mar
Shares O/S (mn) 18
Price Target ($) 52.00
Price Target End Date 31-Dec-14
Annie's, Inc. (BNNY;BNNY US)
FYE Mar 2012A 2013A 2014E 2015E
EPS Reported ($)
Q1 (Jun) 0.11 0.12 0.13A 0.15
Q2 (Sep) 0.22 0.24 0.29A 0.35
Q3 (Dec) 0.14 0.15 0.21A 0.25
Q4 (Mar) 0.24 0.29 0.36 0.44
FY 0.71 0.80 0.99 1.19
Bloomberg EPS FY ($) 0.67 0.79 0.98 1.20
Source: Company data, Bloomberg, J.P. Morgan estimates.
We start our company-by-company analyses with the exception to our rule about
favoring top line stories. Although Annie's is the best top line growth story in our
packaged food coverage (which in a normal year might place it in the Overweight
bucket), we expect sales growth to decelerate next year because of competition. We
want to be prudent about high growth stories with possibly decelerating revenue
growth, and thus we have a Neutral rating with a positive longer-term bias on the
company itself.
Competition set to heat up. In August, when we downgraded BNNY (link) we
spoke with some of its customers about the companys key categories, namely
organic macaroni & cheese and salty snacks. It is our understanding that at least one
sizable organic food manufacturerpossibly WWAV with its Horizon Organic
brandmay be planning to launch a series of shelf stable products in these exact
categories early next year. We believe these products will be designed to take market
share from Annies and benefit from strong category growth rates. Unlike
conventional brands such as KRFTs mac and cheese, Horizon has an equity that
may be able to travel into other organic categories (assuming it is marketed well).
Our take on Annies as a fundamental company remains constructive. We
continue to view Annies as one of the best fundamental stories in our coverage
universe. The growth of organic consumption in its categories, as well as Annies
ability to garner better shelf placement and introduce successful new products, allows
the top line to grow at an unparalleled rate among public food companies. Our
Neutral rating does not reflect any alteration in our view of core fundamentals,
management strategy (which we still think is wise), or execution.
Stocks recent outperformance leads to risk/reward in equilibrium. Over the last
30 days, BNNY has risen 15%, the best in our packaged food coverage by a margin
of nearly 500 basis points over the next best (median food stock -3% over this time).
As a result, the NTM P/E now sits at what we see as a very full 47x (EV/EBITDA is
25x). Identifying the proper multiple for a company with few true peers most food
companies do not grow the top line anywhere near 20% a year, as Annie's has can
be a challenge. But at some point, especially given potentially stronger competition,
we might expect multiple expansion to decelerate, even with this type of impressive
revenue growth.
18
17 September 2013
Ken Goldman
(1-212) 622-0359
Investment Thesis, Valuation and Risks
Annie's, Inc. (Neutral; Price Target: $52.00)
Investment Thesis
We are Neutral BNNY. Though we are supportive of the companys strategy and
execution, and we believe over the long run Annie's is well-positioned for outsized
growth, we see the near-term upside and downside potential as in balance.
Valuation
We use a 50/50 P/E EV/EBITDA blended methodology. On a P/E basis, we think
40x (average food company P/E roughly 18x) is fair for a company growing earnings
~4x faster than the food group average. For the same reason, we think 20x
EV/EBITDA (food group average ~10-11x) also is reasonable. Using these multiples
and our CY14E estimates, we come to fair value as of December 2014 of $52. Thus
we establish a December 2014 price target of $52; our previous December 2013 price
target was $44.
BNNY Valuation and Price Target
Risks to our rating. Upside: 1) Competition may not be as robust as we expect, 2)
input costs may fall, 3) new products may perform better than expected. Downside:
1) Competition may be more robust than we expect, 2) input costs may rise, 3) new
products may perform less well than expected.
P/E Multiple
Assumed Multiple 40.0x
* CY15E EPS 1.34
= Fair Value Dec-14: P/E Multiple 53.63
EV/EBI TDA Multiple
* CY15E EBITDA 41
= CY15E Enterprise Value 816
- CY15E Net Debt (57)
= Fair Equity Value 873
CY15E Shares Outstanding 17
= Fair Value Dec-14: EV/EBI TDA Multiple 50.45
Average of P/E and EV/EBITDA Multiples
Fair Value Dec-14 (rounded) 52.00
Current Price 47.37
Potential stock upside between now and Dec-14 9.8%
Dividend Yield thru end of 2014 0.0%
Potential TSR between now and Dec-14 9.8%
19
17 September 2013
Ken Goldman
(1-212) 622-0359
Campbell Soup Company
Underweight
Company Data
Price ($) 42.28
52-week Range ($) 48.83-34.30
Market Cap ($ mn) 13,402.76
Fiscal Year End Jul
Shares O/S (mn) 317
Campbell Soup Company (CPB;CPB US)
FYE Jul 2012A 2013A 2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
EPS (Operating) ($)
Q1 (Oct) 0.82 0.88 0.86 0.86 0.90 0.92
Q2 (Jan) 0.64 0.70 0.70 0.70 0.72 0.74
Q3 (Apr) 0.56 0.62 0.55 0.56 0.58 0.60
Q4 (Jul) 0.40 0.43 0.47 0.47 0.45 0.47
FY 2.31 2.48 2.58 2.59 2.65 2.72
Bloomberg EPS FY ($) 2.40 2.61 - 2.60 - 2.75
Despite the stocks recent underperformance (-6%vs. SPX +4% since strong
underperformance began after 8/27), we remain Underweight the CPB shares and we
see meaningful downside risk.
Organic sales guidance arguably too aggressive. Management has said to expect
2% to 3% this year; however, the company did 2% last year despite a slew of new
products, very favorable weather, and easier comps (organic sales were flat in FY12).
We think a lower estimate for FY14E organic sales is reasonable for what we assume
will be a more normal weather year with harder comps, and thus we model 1%.
Its hard to get off the deal needle. We think CPB arguably has become overly
dependent on promotions to drive sales: FY13 marked the seventh straight year in
which promos were an incremental headwind to net sales growth. In order to build
back category strength, we would like to see the company focus more on brand
building activities than dealing back price. See below.
Figure 17: Promotional spending has been a headwind to revenue growth for CPB in 21 of the
last 24 quarters
Source: Company reports and J.P. Morgan. Note: Campbell is on a July fiscal year end calendar.
-4.0%
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20
17 September 2013
Ken Goldman
(1-212) 622-0359
Valuation too high. We think CPBs multiple (16.4x NTM consensus) is a bit
bloated for a company that a) grew EBIT last year only 5.4% despite the
aforementioned tailwinds and b) is only expected to grow EBIT ~6% this year
despite an extra week. We expect multiple contraction to occur as the nature of
CPBs lower growth profile continues to become more accepted around the Street.
We credit CPB for taking some share in soup lately; these share gains, however, may
not be powerful enough to offset the relative lack of tailwinds this year.
Campbell Soup Company (Underweight; Price Target: $38.00)
Investment Thesis
We remain Underweight the CPB shares. Though Campbells top line performed
better last year, we attribute some of the rebound to favorable weather (cold
temperatures and weekend storms). As investors look ahead to this years soup
season, they may see rather difficult comparisons ahead with a still-challenged
category, in our view. We think the stock is overvalued at todays level.
Valuation
We use a 50/50 P/E EV/EBITDA methodology. We believe 14.0x P/E and 8.5x
EV/EBITDAboth below the group averagesreasonably reflect CPBs slower
than average growth profile. Per the chart below, we see fair value as of December
2014 of $38. Thus we establish a December 2014 price target of $38; our previous
December 2013 price target was $40.
CPB Valuation and Price Target
Risks to Rating and Price Target
1) The upcoming soup season also may be cold and stormy, 2) new products may
start working better than we expect, 3) commodity costs may turn more favorable.
P/E Multiple
* CY15E EPS 2.80
= Fair Value: P/E Multiple (Dec-14) 39.18
EV/EBI TDA Multiple
* CY15E EBITDA 1,781
= CY15E Enterprise Value 15,135
- CY15E Net Debt 3,288
= Fair Equity Value 11,847
= Fair Value: EV/EBI TDA Multiple (Dec-14) 37.43
Average of P/E and EV/EBI TDA Multiples
Fair Value: Dec-14 (rounded) 38.00
Current Price 42.42
Potential stock upside between now and Dec-14 -10.4%
Potential TSR between now and Dec-14 -6.0%
21
17 September 2013
Ken Goldman
(1-212) 622-0359
ConAgra Foods
Neutral
Company Data
Price ($) 31.88
52-week Range ($) 37.28-25.51
Fiscal Year End May
Shares O/S (mn) 426
ConAgra Foods (CAG;CAG US)
FYE May 2013A 2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
2016E
EPS (Operating) ($)
Q1 (Aug) 0.44 0.37 0.37 0.47 0.45 0.51
Q2 (Nov) 0.57 0.63 0.63 0.70 0.71 0.76
Q3 (Feb) 0.55 0.70 0.68 0.77 0.75 0.81
Q4 (May) 0.60 0.64 0.62 0.71 0.68 0.75
FY 2.15 2.34 2.30 2.65 2.58 2.83
Bloomberg EPS FY ($) 2.15 - 2.37 - 2.65 -
ConAgra (CAG) Downgrading to Neutral after further review of model
Last week, we maintained our Overweight rating (link) following the company's
negative pre-announcement. We then maintained it again after uncovering some
Nielsen-related data points we interpreted as less than positive (link). But today we
are capitulating, as we are lowering our numbers following a review of our model.
Based on our belief that many of CAGs SKUs in the frozen aisle are not coming
back anytime soon, and given that management lowered fiscal year guidance by a
lower degree than the 1Q miss, we are starting to think consensus estimates contain
downside risk. With these thoughts in mind, our FY14E goes to $2.30 from $2.34
(consensus $2.37) and FY15E to $2.58 from $2.65 (consensus $2.65). We introduce
FY16E at $2.83 (consensus $3.02).
We appreciate that possible upside may come from cost synergies, as well as lower
costs. But given our renewed focus on revenues, we now think cost savings and
margins are less important than the possibility CAGs sales disappoint for more than
a quarter. Finally, we understand the possible downside cushion given CAGs
lowest-in-class earnings multiple. However, as mentioned above, we think investors
will prefer better top lines for a while, an environment that does not necessarily favor
ConAgra today.
We also note the large amount of uncertainty regarding this company at the moment,
including the exact reasons for the 1Q miss, the duration of the challenges, the
potential for Ralcorp to recover, the impact of the loss of the potato business, the
impact of the divestiture of the milling business, the potential for both top and
bottom line synergies from Ralcorp, and the pace of debt paydowns. We establish a
December 2014 price target of $34; our previous December 2013 target was $36.
We emphasize that we would not necessarily short CAG on an absolute basis, as we
do not see much downside to the current stock price.
ConAgra Foods (Neutral; Price Target: $34.00)
Investment Thesis
We are Neutral the CAG shares. Though we appreciate that CAGs valuation metrics
are attractive, we are concerned that earnings estimates need to drop further, and
CAG does not fit into our current philosophy of buying higher top line growth
stocks. We think the shares could be relatively dead money for a while.
22
17 September 2013
Ken Goldman
(1-212) 622-0359
Valuation
We establish a December 2014 price target of $34; our previous December 2013
target was $36. We use a 50/50 P/E EV/EBITDA methodology. We believe 13.5x
P/E and 8.5x EV/EBITDAboth below the group meansare reasonable given the
companys current challenges:
CAG Valuation and Price Target
Upside: 1) 1Q's problems may not last, 2) The Ralcorp synergies may be greater than
we expect, 3) Lower input costs may raise earnings larger than we expect. Downside:
1) Ralcorp may not turn around as we expect, 2) Execution problems with the RAH
acquisition may take place, 3) Further SKU rationalization may occur.
P/E Multiple
* CY15E EPS 2.72
EV/EBI TDA Multiple
= Fair Value: EV/EBITDA Multiple (Dec-14) 31.49
Fair Value as of Dec-14 (rounded) 34.00
Current Price 32.09
23
17 September 2013
Ken Goldman
(1-212) 622-0359
General Mills
Neutral
Company Data
Price ($) 49.25
52-week Range ($) 53.07-38.79
Fiscal Year End May
Shares O/S (mn) 665
General Mills (GIS;GIS US)
FYE May 2012A 2013A 2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
EPS Operating ($)
Q1 (Aug) 0.64 0.66 0.69 0.70 0.74 0.75
Q2 (Nov) 0.76 0.86 0.89 0.90 0.94 0.96
Q3 (Feb) 0.55 0.64 0.66 0.67 0.71 0.73
Q4 (May) 0.60 0.53 0.64 0.63 0.68 0.69
FY 2.56 2.69 2.88 2.90 3.08 3.12
Bloomberg EPS FY ($) 2.54 2.70 - 2.91 - 3.14
We are Neutral GIS. Though we see less risk to Mills than its cereal peer Kellogg,
and we think the company has a potential catalyst if it ever starts growing Greek
yogurt at a faster rate, we think a Neutral rating is appropriate for this relatively
lower top line growth name.
We are raising our estimate for 1Q14 by a penny and taking FY14E and FY15E up
slightly, too, to account for more favorable input costs than we expected. Mills is
scheduled to report 1Q14E tomorrow morning:
Figure 18: GIS 1Q14E JPM vs. Bloomberg Consensus
$ in millions
Source: Bloomberg, company reports, and J.P. Morgan.
In our view, Mills will be a solid and consistent ~7%-8%EPS grower, plus it throws
off a ~3% annual dividend yield. 10%-11%total shareholder return is not bad; we
JPM Est. Consensus
Net Sales 4,271 4,293
Gross Profit 1,622 1,624
Operating Income 738 741
EPS 0.70 0.70
EBITDA 893 895
Margins and Growth
Sales Growth Y/Y 5.4% 6.0%
Gross Margin 38.0% 37.8%
SG&A Margin 20.7% 20.6%
EBIT Margin 17.3% 17.3%
Tax Rate 32.2%
Segments
US Retail
Sales Growth 2.0%
Margin 23.4%
International
Sales Growth 14.8%
Margin 11.9%
Bakeries & Foodservice
Sales Growth 2.0%
Margin 14.7%
24
17 September 2013
Ken Goldman
(1-212) 622-0359
merely see slightly better options in other stocks we cover at the moment and we
favor stocks with better top line potential in the near term.
General Mills (Neutral; Price Target: $50.00)
Investment Thesis
We rate the shares of GIS Neutral. With the RTE cereal category still a bit sluggish
and Mills yogurt yet to fully rebound, we think it is prudent to remain on the
sideline. Mills remains a healthy option for longer-term, more risk-averse investors,
in our view, who are looking for dividend yields, but we think it could lag some
better top line growers over the next 6-12 months.
Valuation
EV/EBITDA a bit below the group averages reasonably reflect GISs relatively
stable growth profile. This leads us to think $50 is fair value as of December 2014.
We therefore establish a December 2014 price target of $50; our previous December
2013 target was $52 (we are lowering our multiples for many stocks today).
GIS Valuation and Price Target
Source: Bloomberg and J.P. Morgan estimates. Note: EBITDA factors JV income and income from non-controlling interests.
Upside: 1) Commodity costs may fall, 2) GIS innovation may prove successful, 3)
accretive M&A may take place. Downside: 1) Commodity costs may rise, 2)
competitors may lower Greek yogurt prices, 3) competitors may get more aggressive
with cereal.
P/E Multiple
* CY15E EPS 3.29
EV/EBI TDA Multiple
Current Price 49.73
25
17 September 2013
Ken Goldman
(1-212) 622-0359
Hain Celestial Group
Overweight
Company Data
Price ($) 79.40
52-week Range ($) 85.48-51.51
Fiscal Year End Jun
Shares O/S (mn) 49
Hain Celestial Group (HAIN;HAIN US)
FYE Jun 2012A 2013A 2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
EPS (Operating) ($)
Q1 (Sep) 0.30 0.40 0.57 0.57 0.68 0.68
Q2 (Dec) 0.41 0.72 0.84 0.84 0.97 0.98
Q3 (Mar) 0.54 0.72 0.88 0.88 1.01 1.02
Q4 (Jun) 0.47 0.65 0.73 0.72 0.84 0.85
FY 1.86 2.53 3.02 3.02 3.50 3.52
Bloomberg EPS FY ($) 1.80 2.46 - 3.02 - 3.45
We continue to see upside in Hain and establish a December 2014 price target of
$94; our previous December 2013 price target was $86. Pursuant to our current
philosophy of investing in higher revenue-growing companies, Hain remains near the
top of our list of preferred stocks. We also see upside to our estimates should the
company, as is its goal, continue to make accretive acquisitions.
Some investors with whom we spoke last week wonder why, despite a strong
natural/organic category, Hains EQ units have been merely flat the last two months.
Though we would prefer to see EQ unit growth higher than flat, we also might point
out some mitigating factors, including a positive mix effect.
Mix is becoming a bigger driver of sales growth. As high price products
such as baby food in pouches sell faster than some lower-priced products in
the portfolio, Hain's product mix is increasingly important as a top line driver.
Indeed, in the last two years, the percentage of Hain's sales from products
priced above the total company average price/EQ unit has risen to 41% from
32%. In the last 12 weeks, HAIN sales from products priced above the
company mean grew 28% versus -2% for those below the mean. Thus, when
Nielsen reports HAIN price/EQ unit up 11% Y/Y, much of this figure is
driven by mix, not true pricing, we believe. We see this as a positive because
mix (often consumer driven) can be more sustainable as a sales driver than
pricing (often manufacturer driven) in the longer run, we believe.
EQ units look much better on a two-year stacked basis than a one-year
basis. Though EQ units were 0% last month, they were +8% on a two-year
basis, in line with recent trends.
In recent periods, actual units have started to rise faster than equivalent
units. As mentioned, we would like to see EQ units (units that are normalized
for weight) rise faster than the 0% of the last two months in measured
channels. But we are encouraged to see actual units start to rise faster (+4%
last month, e.g.). Hain's units do not always rise faster than EQ units, so we do
not want to say this is a long-term trend; however, we think the recent
relationship should be considered when looking at Hains data. Based on our
conversations with management recently, we believe Hain has been making
numerous adjustments to pack sizes in a variety of categories, which could
temporarily be skewing the EQ unit data. But we cannot necessarily confirm
this ourselves via the data at this time.
26
17 September 2013
Ken Goldman
(1-212) 622-0359
Keep in mind that Nielsen Co. xAOC data measures only around 40% of
Hains total sales.
Hain Celestial Group (Overweight; Price Target: $94.00)
Investment Thesis
We are Overweight the HAIN shares. With healthy eating trends growing quickly
and the company benefitting from accelerated distribution expansion, we see room
for continued high single digit organic growth in the US. We also see further growth
in the UK business on both the top and bottom lines.
Valuation
EV/EBITDA a bit below the current NTM consensus figures, which we think are
slightly bloated at the moment reasonably reflect HAINs fast growth profile.
These multiples atop our CY15 estimates lead us to $94 fair value as of Dec-14.
HAIN Valuation and Price Target
1) An economic slowdown could impair consumers desire to buy higher priced
food, 2) input costs may rise, 3) supply of organic foodstuffs may be difficult to
obtain.
P/E Multiple
* CY15E EPS 3.73
EV/EBI TDA Multiple
* CY15E EBITDA 350
- CY15E Net Debt 201
Current Price 80.19
Dividend Yield 0.0%
27
17 September 2013
Ken Goldman
(1-212) 622-0359
Hershey
Overweight
Company Data
Price ($) 91.58
52-week Range ($) 98.00-68.09
Fiscal Year End Dec
Shares O/S (mn) 227
Hershey (HSY;HSY US)
FYE Dec 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
EPS (Operating) ($)
Q1 (Mar) 0.96 1.09A 1.09A 1.19 1.18 1.29
Q2 (Jun) 0.66 0.72A 0.72A 0.79 0.79 0.84
Q3 (Sep) 0.87 1.00 0.99 1.11 1.10 1.22
Q4 (Dec) 0.74 0.90 0.90 1.00 1.00 1.12
FY 3.23 3.71 3.71 4.09 4.06 4.47
Bloomberg EPS FY ($) 3.25 - 3.71 - 4.10 4.48
We continue to recommend HSY. Hershey fits squarely into our buy the top line
thesis at this point. We see nothing in Nielsen Co. data or our channel checks to
suggest Hersheys top line is slowing by any meaningful amount.
Cocoa a margin headwind, top line tailwind. We believe recently higher cocoa
prices eventually will impair margin growth, but given the length of HSYs hedges
we expect no impact until late 2014 or early 2015. The positive side of higher cocoa
prices, of course, is that Hershey likely will pass them on to customers in the form of
higher prices, and chocolate candy historically has been a relatively inelastic
category. So investors focused on margins may not like Hershey as much as they
once did; but investors focused on revenues as we are at the moment may see an
opportunity for sales growth acceleration later in 2014 or in 2015.
Estimates. We reduce 2014E to $4.06 from $4.09 (consensus $4.10) to account for
the possibility of a late-year margin squeeze. We introduce 2015E of $4.47
(consensus $4.48).
Hershey (Overweight; Price Target: $105.00)
Investment Thesis
We are Overweight Hershey. HSY has been and, in our opinion, should continue to
be, one of the steadiest top line stories in packaged food. The opportunity in China is
underappreciated, we believe, with the chocolate category there growing double
digits. For investors able to stomach the high valuation, we think HSY remains a
smart long-term choice.
Valuation
We use a 50/50 P/E EV/EBITDA methodology. We believe 23x P/E and 13.5x
EV/EBITDAabove the group meansreasonably reflect HSYs better than
average growth profile, opportunities to grow in China and via Brookside, and strong
category attributes. We establish a December 2014 price target of $105; our previous
December 2013 price target was $100. See below:
28
17 September 2013
Ken Goldman
(1-212) 622-0359
HSY Valuation and Price Target
Risks to rating and price target. 1) The China opportunity may not be as robust as
we believe, 2) Brookside may disappoint, 3) Mars and/or other competitors may
become more aggressive.
P/E Multiple
* 2015E EPS 4.47
EV/EBI TDA Multiple
* 2015E EBITDA 1,822
= 2015E Enterprise Value 24,592
- 2015E Net Debt 1,102
2015E Shares Outstanding 219
Current Price 92.71
29
17 September 2013
Ken Goldman
(1-212) 622-0359
Hillshire Brands
Overweight
Company Data
Price ($) 31.66
52-week Range ($) 37.28-24.96
Fiscal Year End Jun
Shares O/S (mn) 125
Hillshire Brands (HSH;HSH US)
FYE Jun 2013A 2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
EPS (Operating) ($)
Q1 (Sep) 0.49 0.36 0.33 0.42 0.39
Q2 (Dec) 0.62 0.55 0.54 0.65 0.61
Q3 (Mar) 0.35 0.43 0.44 0.50 0.48
Q4 (Jun) 0.26 0.38 0.41 0.45 0.43
FY 1.72 1.73 1.72 2.01 1.91
Bloomberg EPS FY ($) 1.71 - 1.68 - 1.92
We are Overweight HSH because we think the company's opportunity to improve its
brand equities and margins is strong, and we also think (per management's guidance)
that the company is committed to making strong, accretive acquisitions.
We also note that the most important input for HSH pork trimmings are down
significantly since the company gave guidance for the fiscal year:
Figure 19: Pork trimmings, HSH's most important meat input, are down significantly since last
guidance was issued ($/cwt)
Source: USDA and J.P. Morgan.
So it is possible that there is upside to consensus estimates, and we remain
comfortable with our Overweight rating.
That said, there are some reasons HSH is not among our very top picks at this time.
First, we think 1Q14 could be very challenging and we are lowering our estimate to
$0.33 from $0.36 (consensus $0.36) to reflect the possibility of sluggish margins. We
also are taking down 2014E to $1.72 from $1.73 and 2015E to $1.91 from $2.01
(consensus $1.92) because of the possibility the packaged meats category could
remain highly competitive for longer than we anticipate.
6
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2013 Normal Seasonal Trend
Trimmings were $99 when
HSH issued FY14E
guidance in early Aug.
30
17 September 2013
Ken Goldman
(1-212) 622-0359
Second, we would not include HSH in our list of high revenue growth names. So
while we like it and would own it versus many other names we cover the upside to
our price target is large it is not our top pick at the moment.
Hillshire Brands (Overweight; Price Target: $35.00)
Investment Thesis
We are Overweight HSH. Most of our long-term confidence builds on our theory that
CEO Sean Connolly and team are investing smartly in R&D and marketing in a way
that will drive sales volumes higher than the Street anticipates. We continue to model
low single digit growth over the next couple of years; however, we see upside to our
figures should the companys innovation efforts pan out as we think they may. We
also see the opportunity for HSH to add to EBITDA by buying other assets (per
management).
Valuation
EV/EBITDA both below the group mean reasonably reflect HSHs status as
company with relatively high margin volatility and lower top line growth. These
metrics atop our CY15 estimates get us to fair value as of December 2014 of $35.
Thus we establish a December 2014 target price of $35; our previous December 2013
target price was $37 (we are lowering multiples almost across the board in our
space).
HSH Valuation and Price Target
1) Meat costs may rise, 2) innovation may not be successful, 3) M&A opportunities
may not materialize.
P/E Multiple
* CY15E EPS 2.00
EV/EBI TDA Multiple
* CY15E EBITDA 549
Current Price 31.88
Dividend Yield (approx, now thru end of 2014) 2.8%
31
17 September 2013
Ken Goldman
(1-212) 622-0359
J.M. Smucker Co.
Overweight
Company Data
Price ($) 107.87
52-week Range ($) 114.72-81.60
Fiscal Year End Apr
Shares O/S (mn) 106
J.M. Smucker Co. (SJM;SJM US)
FYE Apr 2013A 2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
2016E
EPS Reported ($)
Q1 (Jul) 1.17 1.24A 1.24A 1.35 1.41 1.48
Q2 (Oct) 1.45 1.60A 1.60A 1.75 1.78 1.87
Q3 (Jan) 1.47 1.61A 1.62A 1.65 1.72 1.82
Q4 (Apr) 1.29 1.36 1.37 1.50 1.41 1.50
FY 5.38 5.82 5.82 6.26 6.31 6.68
Bloomberg EPS FY ($) 5.24 - 5.83 - 6.31 -
Like HSH, SJM is not at the top of our list at the moment because it has less organic
growth than some other names we cover. Nevertheless, we think guidance may be
conservative and we continue to admire the operational strength of this company.
We see further earnings beats to come. We continue to see upside in the stock and
point out that SJM historically has been conservative with guidance. Thus, when
after only one quarter of the fiscal year, management says it is cautiously optimistic
in the high end of guidance as it did last month we see this as positive indicator
of further earnings beats ahead.
We think bean costs will stay muted. Smuckers EBITDA generally is more
sensitive to the cost of the underlying Arabica or Robusta coffee bean than changes
in, for example, K-Cup sales growth. Though we are not commodity analysts, our
research suggests bean costs will stay relatively attractive over the next 12 months
thanks to a strong crop in Brazil. This should lead to continued margin strength for
SJM. There is nothing more important for SJMs EBITDA than bean costs, in our
experience.
Adjusting estimates. FY15E goes to $6.31 from $6.26 (consensus $6.31) as our
confidence in a strong Arabica crop from Brazil has increased recently. We introduce
FY16E at $6.68 though we admit visibility this far out is limited.
J.M. Smucker Co. (Overweight; Price Target: $118.00)
Investment Thesis
We are Overweight SJM. Over time, we believe the at-home coffee category will
continue to be one of the faster growing ones in consumer staples. Though SJM may
continue to lose share in K-Cups to competitors, we see these losses as largely offset
by the fast pace of single-serve growth as a category. SJM historically has been a
well-run business with a solid marketing strategy.
Valuation
EV/EBITDA slightly below the group mean reasonably reflect SJMs mostly-US
business (meaning: potentially a bit less growth than some peers over time). We
establish a December 2014 target price of $118; our previous December 2013 target
price was $115 (we are lowering multiples across most of our coverage today):
32
17 September 2013
Ken Goldman
(1-212) 622-0359
SJM Valuation and Price Target
1) Green coffee costs could rise, 2) SJM may lose more share in K-Cups than we
expect, 3) At home coffee consumption trends may slow.
P/E Multiple
* CY14E EPS 6.55
EV/EBI TDA Multiple
Current Price 107.92
33
17 September 2013
Ken Goldman
(1-212) 622-0359
Kellogg
Underweight
Company Data
Price ($) 60.64
52-week Range ($) 67.98-50.21
Fiscal Year End Dec
Shares O/S (mn) 367
Kellogg (K;K US)
FYE Dec 2011A 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
EPS (Operating) ($)
Q1 (Mar) 1.07 1.08 0.99A 0.99A 1.05 1.06 1.12
Q2 (Jun) 1.00 0.90 1.00A 1.00A 1.10 1.09 1.15
Q3 (Sep) 0.85 0.89 0.89 0.87 0.95 0.94 0.99
Q4 (Dec) 0.65 0.65 0.87 0.85 0.92 0.91 0.96
FY 3.57 3.52 3.75 3.71 4.02 3.99 4.22
Bloomberg EPS FY ($) 3.37 3.38 - 3.79 - 4.09 4.43
Downgrading Kellogg (K) to Underweight from Neutral. We recommend
investors exhibit a level of caution with Kellogg. Because of our top line concerns,
we are lowering 2013E to a Street-low $3.71 from $3.75 (consensus $3.79), and
2014E to $3.99 from $4.02 (consensus $4.10).
We observe the particularly difficult top line comparison approaching in 4Q13E,
with 4Q12's organic growth having risen 5.3% (versus 2.5% for the whole year).
Our concern derives largely from slumping trends in Nielsen Co. xAOC-tracked
channels, which we think could cause the company to report lower-than-expected
sales and earnings. See below:
Figure 20: Kelloggs sales trends have been slipping lately in
measured channels
Figure 21: Primarily because of eroding velocities ($ sales per
distribution point)
$ Sales Y/Y 4-Wk 12-Wk 52-Wk
ANNIE'S INC 22.2% 21.8% 16.5%
HAIN CELESTIAL GROUP 11.4% 8.5% 8.7%
HERSHEY CHOCOLATE CANDY-NON-SEASONAL 4.9% 8.4% 7.6%
MONDELEZ INTERNATIONAL INC 3.4% 4.6% 3.9%
CAMPBELL SOUP CO 2.8% 3.7% 4.2%
HILLSHIRE BRANDS CO 2.2% 1.4% 1.8%
TOTAL FOOD (INCL. PERIMETER) 1.8% 1.9% 2.2%
KRAFT FOODS INC. 1.0% 0.2% -0.5%
PRIVATE LABEL (DRY GROCERY) 0.7% 1.2% 2.2%
KELLOGG COMPANY -0.7% -0.6% 0.3%
GENERAL MILLS INC -2.4% -0.8% -1.3%
J. M. SMUCKER COMPANY -3.4% -3.3% -0.3%
CONAGRA INC -5.3% -3.5% -1.3%
Velocity Y/Y 4-Wk 12-Wk 52-Wk
ANNIE'S INC 10.5% 11.3% 7.4%
HAIN CELESTIAL GROUP 9.4% 5.7% 2.9%
TOTAL FOOD (INCL. PERIMETER) 1.5% -0.3% -1.2%
KRAFT FOODS INC. 1.2% -0.7% -3.1%
HERSHEY CHOCOLATE CANDY-NON-SEASONAL 1.2% 4.0% 4.3%
MONDELEZ INTERNATIONAL INC -2.0% 0.3% 1.0%
PRIVATE LABEL (DRY GROCERY) -3.2% -2.8% -2.6%
HILLSHIRE BRANDS CO -3.4% -3.1% 1.2%
CAMPBELL SOUP CO -5.2% -5.2% -6.0%
GENERAL MILLS INC -6.7% -4.4% -4.1%
KELLOGG COMPANY -7.8% -7.7% -6.1%
CONAGRA INC -8.4% -6.5% -3.3%
J. M. SMUCKER COMPANY -10.2% -10.0% -6.4%
34
17 September 2013
Ken Goldman
(1-212) 622-0359
Figure 22: Kellogg's sales declines are not caused by difficult comparisons; in fact, on a two-year
stacked basis trends arguably appear even softer
$ sales Y/Y, 2-year stacked
Kelloggs ROIC well off 2010 peak, lagging the group. Since peaking in early
2010, Kelloggs ROIC has dropped consistently. In fact, on a cumulative basis since,
the companys LTM ROIC has declined by a greater rate than any traditional,
branded packaged food company we cover (excluding KRFT and MDLZ, for which
we do not have enough historical data).
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35
17 September 2013
Ken Goldman
(1-212) 622-0359
Figure 23: Kellogg's ROIC has fallen by a greater degree since peaking in early 2010 than any
other branded, traditional packaged food stock we cover
cumulative change in LTM ROIC; 100 = ROIC 14 periods ago
Source: Company reports and J.P. Morgan estimates. Note: Excludes non-recurring gains and losses. ROIC = NOPAT/Average Book
Value of Capital. Excludes MJN, which we see as non-traditional food (MJN would appear worse than K, for the record). As of 8/1/13.
We remain concerned about trends in US biscuits. US Snacks organic sales
growth was a disappointing -3.3% last quarter. Though the company pointed to
potentially better days ahead, and we model improvement in 2014E, we are not
confident that a quick turnaround is afoot. We would understand if Snacks personnel
had focused their attention over the last 12 months more on Pringles than on legacy
brands; it might be reasonable to expect now that the acquisition is fully integrated,
trends will improve, but this is not certain.
Much time on last quarters call was spent on cereal investments. Some analysts
lobbied for greater investment, some for less. We see the debate as symptomatic of a
category that arguably has been struggling for years, with various efforts to turn it
around having had mixed results. We continue to believe RTE cereal will be a low
growth category in the US unless breakthrough innovation arrives (either in the form
of health/wellness or packaging). Barring such a change, we do not necessarily
recommend that Kellogg or any of its cereal manufacturing peers toss extra
marketing money at the category just yet.
Latin American volumes and margins continue to lag. Many food companies
have experienced strong volumes in LatAm recently (notably MJN, e.g.) but K is not
necessarily one of them. Partly because of price increases as a result of devaluation
issues, et al, volumes potentially could decline for the third year out of four.
Kelloggs operating margin in the region is on pace to lose ~300 basis points over the
past three years.
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-14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0
Period
K CPB GIS CAG MKC SJM HSY
36
17 September 2013
Ken Goldman
(1-212) 622-0359
We establish a December 2014 target price of $58; our previous December 2013
target was $65. We expect some pushback on this call, as K already has fallen 8% in
the last month (SPX -4%). But we see further potential downside in the shares, the
group as a whole has not performed much better (-3% median over the last month)
than K, and the short interest ratio has fallen well off its summer peak. K may not
have enough downside juice left to be a strong absolute short, but on a relative
basis we might pair it against other names we prefer.
Kellogg (Underweight; Price Target: $58.00)
Investment Thesis
We are Underweight the K stock. On the one hand, cheaper input costs likely will
lead to margin improvement, and the stock already is well off its peak. On the other
hand, we do not see much room for multiple expansion, and recent distribution gains
can be fleeting. We think the companys recent sales softness versus packaged food
as a whole will continue and we are concerned about ROIC declines. We do not see
K as an absolute short but as a relative underperformer.
Valuation
We believe 14.5x P/E and 9.0x EV/EBITDA both below the group averages
reasonably reflect Ks historically lower-than average growth profile, as well as the
risk of further product recalls and/or operational setbacks. Applying these multiples
to our 2015 estimates and averaging the results, we come to $58 fair value as of
December 2014. Thus we establish a December 2014 price target of $58; our
previous December 2013 price target was $65:
K Valuation and Price Target
1) Margins may rise higher than we model, 2) cereal distribution may continue to
grow faster than we expect, 3) further cereal innovation may impress.
P/E Multiple
* 2015E EPS 4.22
EV/EBI TDA Multiple
* 2015E EBITDA 2,864
- 2015E Net Debt 5,406
Current Price 60.98
Potential stock upside between now and Dec-14 -4.9%
Potential TSR between now and Dec-14 -1.0%
37
17 September 2013
Ken Goldman
(1-212) 622-0359
Kraft Foods Group
Neutral
Company Data
Price ($) 54.24
52-week Range ($) 58.76-42.00
Fiscal Year End Dec
Shares O/S (mn) 597
Kraft Foods Group, Inc. (KRFT;KRFT US)
FYE Dec 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
EPS Reported ($)
Q1 (Mar) 0.82 0.76A 0.76A 0.79 0.84 0.91
Q2 (Jun) 1.00 0.76 0.76 0.84 0.91 0.97
Q3 (Sep) 0.79 0.72 0.73 0.86 0.83 0.91
Q4 (Dec) 0.17 0.58 0.59 0.72 0.68 0.76
FY 2.75 2.83 2.85 3.21 3.26 3.54
Bloomberg EPS FY ($) 2.88 - 2.88 - 3.22 3.42
Kraft is our favorite Neutral-rated stock. We have a theory about food investing,
that given a forced choice, we would rather own great brands and categories with less
skilled managers than the opposite, but Kraft is putting this theory to the test. We are
not enamored of the companys categories (cheese, e.g., can be irrational from time
to time and is heavily weighted toward store brands). But we continue to support
CEO Tony Vernons vision for the future of his company, and we see more earnings
beats ahead based on his plan to drive cost cutting and turn savings into top line
growth over the long run.
We still have a few too many hesitations, however, to get more aggressive at this
time. Without better top line growth (Kraft is one of the lower growth companies we
cover right now, though this could improve) and absent a valuation case (which we
do not have right now), it is hard for us to upgrade at this time. We also note that
Street estimates are 10c above consensus with only two quarters left in the year, so
the chance for further, meaningful earnings beats is somewhat limited. Should the
stock pull in to a lower level, we may become more comfortable with the valuation.
Adjusting estimates. We raise 2013E to $2.85 (consensus $2.88, guidance $2.78);
we raise 2014E to $3.26 from $3.21 (consensus $3.22) to reflect the possibility that
KRFT applies some of its cash balance toward share buybacks or debt paydown; we
introduce 2015E at $3.54 (consensus $3.42).
Kraft Foods Group (Neutral; Price Target: $57.00)
Investment Thesis
We are Neutral KRFT. We think CEO Tony Vernon and team have the proper
strategy in place to turn the business around (cut costs and reinvest the savings in
price/mix to build volume); however, we are concerned in the near term about what
seem to be disappointing sales trends, at least as measured by the Nielsen Co. We
also observe that cheese costs have risen. With the stock over 18x P/E and the
dividend payout ratio set to drop in 2014, we remain on the sideline. But of all the
Neutral-rated stocks we cover, KRFT remains one of our favorites. We might look
for a slightly better entry point if valuation metrics come in and/or fundamentals
improve.
38
17 September 2013
Ken Goldman
(1-212) 622-0359
Valuation
EV/EBITDA both a bit below the group mean reasonably reflect what should be
a slightly-below industry average growth profile over the long term (thanks to a
North America-only business). These multiples atop our 2015 estimates lead us to a
$57 fair value as of December 2014. Thus we establish a December 2014 price target
of $57; our previous December 2013 price target was $59, but we are lowering
multiples across most of our stocks today (especially for ones that rely by a greater
degree on dividends for TSR, such as KRFT):
KRFT Valuation and Price Target
Upside: 1) Cost savings and higher margins may arrive quicker than we expect, 2)
the company may start applying its cash balance to the P/L, 3) commodity costs may
fall. Downside: 1) cost savings may take longer to materialize than anticipated, 2) top
line struggles may continue, 3) commodity costs may rise.
P/E Multiple
* 2015E EPS 3.55
EV/EBI TDA Multiple
* 2015E EBITDA 4,131
- 2015E Net Debt 8,359
Current Price 54.79
39
17 September 2013
Ken Goldman
(1-212) 622-0359
McCormick & Co., Inc.
Neutral
Company Data
Price ($) 67.79
52-week Range ($) 75.26-60.06
Fiscal Year End Nov
Shares O/S (mn) 134
McCormick & Co., Inc. (MKC;MKC US)
FYE Nov 2011A 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
EPS (Operating) ($)
Q1 (Feb) 0.57 0.55 0.57A 0.57A 0.61 0.60 0.66
Q2 (May) 0.55 0.60 0.59A 0.59A 0.67 0.65 0.71
Q3 (Aug) 0.69 0.78 0.79 0.78 0.88 0.86 0.93
Q4 (Nov) 0.98 1.11 1.21 1.21 1.33 1.30 1.40
FY 2.79 3.04 3.15 3.14 3.47 3.41 3.69
Bloomberg EPS FY ($) 2.78 3.08 - 3.16 - 3.49 3.84
We are Neutral the MKC stock. We believe over time, the companys strong
market share in a growing category (flavor) will allow it to grow faster than most
food stocks. We think that currently, however, Street estimates and valuations are a
bit ahead of themselves.
Trimming estimates. We reduce FY13E to $3.14 from $3.15 (consensus $3.16) and
FY14E to $3.41 from $3.47 (consensus $3.49). We introduce FY15E at $3.69
(consensus $3.84). Our numbers are coming down partly to reflect continued risks in
China. Though we like exposure to China in general, MKC is exposed to some
restaurants that may be a bit sluggish at the moment.
McCormick & Co., Inc. (Neutral; Price Target: $70.00)
Investment Thesis
We are Neutral the MKC stock. We look favorably upon the companys Consumer
segment and think it will continue to perform well. As for Industrial, it is a solid
business but struggling a bit at the moment. We expect a turnaround in Industrial
eventually, but with the stocks multiple above the group mean, total shareholder
return may be limited in the near term.
Valuation
We use a 50/50 P/E EV/EBITDA methodology. We believe 19x P/E and 12x
EV/EBITDA both above the group mean reasonably reflect MKCs strong
fundamental positioning in a healthy category. We establish a December 2014 price
target of $70 based on our valuation figure below; our previous December 2013
target was $69.
40
17 September 2013
Ken Goldman
(1-212) 622-0359
MKC Valuation and Price Target
Source: Bloomberg and J.P. Morgan estimates. Note: Our EBITDA estimate includes income
from unconsolidated operations.
Upside: 1) US at-home eating trends could improve further, 2) consumers may trade
up more, 3) the company could do an accretive acquisition (part of its stated model is
growing via M&A). Downside: 1) QSR trends may worsen, 2) input costs may rise,
3) M&A may not take place.
P/E Multiple
* CY15E EPS 3.72
EV/EBI TDA Multiple
* CY15E EBITDA 827
Current Price 68.68
41
17 September 2013
Ken Goldman
(1-212) 622-0359
Mead Johnson Nutrition
Overweight
Company Data
Price ($) 75.64
52-week Range ($) 86.87-61.27
Fiscal Year End Dec
Shares O/S (mn) 203
Mead Johnson Nutrition (MJN;MJN US)
FYE Dec 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
EPS ($)
Q1 (Mar) 0.80 0.79A 0.79A 0.96 0.95 1.10
Q2 (Jun) 0.85 0.75A 0.75A 0.92 0.94 1.06
Q3 (Sep) 0.71 0.80 0.80 0.84 0.86 0.96
Q4 (Dec) 0.74 0.77 0.78 0.85 0.88 0.96
FY 3.09 3.26 3.26 3.56 3.64 4.08
Bloomberg EPS FY ($) 3.04 - 3.26 - 3.56 3.93
Upgrading Mead Johnson (MJN) to Overweight from Neutral
We believe today, when analyzing MJN, the companys top line growth should be
valued more highly than the pending cost headwinds and the possibility of further
Chinese government intervention.
We also see the following tailwinds:
Relatively easy comparisons approaching. In 2H12, MJN faced a number of
issues including a pricing problem in China that led to unusually low
sales growth in the Asia/Pacific region (+1% 3Q, +10% 4Q). The company
is about to lap these periods, and we are starting to think Street estimates for
2H13's revenue growth may not be high enough.
Cash flow set to rise in a year. MJN is currently building a large spray dryer
in Singapore. This facility is costing the company a great deal of cash in the
form of capital spending, a cost that goes away at some point next year
when the dryer opens. We model free cash flow increases of $90MM in
2014E and $180MM in 2015E.
China may ease its one baby policy. Various reports (including here) have
suggested China could loosen its one baby policy by the end of this year.
We have no particular insight into the veracity of this outlook, and we
expect any change to be very slow, but any actual news about more babies
in China likely would be constructive for the MJN stock, we believe.
Fertility rates improving slightly in the US. According to the National
Center for Health Statistics (link to article), US fertility rates are leveling off
for the first time since the recession. If true, this should be a positive for
MJN.
The company may get more aggressive in buying back stock. Because of
better cash flow in future years, we think MJN will have more firepower to
return cash to shareholders via buybacks. The company's new $500MM
authorization calls allows for opportunistic stock repurchase, a phrase that
differs from the prior primarily intended [to] offset [the] dilutive effect of
stock-based compensation.
For these reasons, we raise 2014E to $3.64 from $3.56 (consensus $3.56) and
introduce 2015E at $4.08 (consensus $3.93). We establish a December 2014 price
target of $88; our previous December 2013 target was $78.
42
17 September 2013
Ken Goldman
(1-212) 622-0359
Mead Johnson Nutrition (Overweight; Price Target: $88.00)
Investment Thesis
We are Overweight MJN. We appreciate that ROIC has been slipping and cost
headwinds are afoot. But given our belief that food companies with higher top line
growth rates should be valued highly today, and considering the possibility of better
cash flow and EPS growth via buybacks, we think an Overweight rating is
appropriate.
Valuation
EV/EBITDA about 3x above the group mean reasonably reflect MJNs better
than average growth profile. At these multiples and using our new 2015 estimates,
we come to fair value of $88 as of December 2014. Thus we establish a December
2014 price target of $88; our previous December 2013 price target was $78.
MJN Valuation and Price Target
Risks to rating and price target. 1) Cash flow may not be as strong as we expect, 2)
China may further foster growth of domestic players, 3) powdered milk costs may
rise further.
P/E Multiple
* 2015E EPS 4.08
EV/EBI TDA Multiple
* 2015E EBITDA 1,195
- 2015E Net Debt 618
Current Price 76.11
Potential upside between now and Dec-14 15.6%
43
17 September 2013
Ken Goldman
(1-212) 622-0359
Mondelz International, Inc.
Overweight
Company Data
Price ($) 31.55
52-week Range ($) 32.91-24.50
Fiscal Year End Dec
Shares O/S (mn) 1,803
Mondelz International, Inc. (MDLZ;MDLZ US)
FYE Dec 2011A 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
Analyst Adjusted Diluted
EPS ($)
Q1 (Mar) - 0.30 0.34A 0.34A 0.29 0.30 0.35
Q2 (Jun) - 0.36 0.37A 0.37A 0.39 0.40 0.45
Q3 (Sep) 0.33 0.38 0.42 0.40 0.45 0.45 0.51
Q4 (Dec) 0.36 0.37 0.39 0.41 0.56 0.57 0.65
FY 1.39 1.47 1.52 1.52 1.69 1.72 1.96
Bloomberg EPS FY ($) 2.29 1.43 - 1.55 - 1.72 1.91
We remain Overweight Mondelz. We believe activist-style investor Nelson Peltz
likely will get a couple of seats on the MDLZ board, and we continue to see
significant margin upside over time. MDLZ fits squarely into our profile of
companies we like right now: 1) relatively high sales growth, 2) Europe exposure,
and 3) less reliance on a dividend yield for TSR.
Our rating is for the longer term, as (once again) we have concerns about the
current quarter. We are lowering 3Q13 to $0.40 from $0.42 to reflect our belief
that margins could be light once again this period. We maintain our 2013E estimate
to reflect our belief the 4Q13 tax rate could be lighter than we previously modeled.
Debt paydown is an underappreciated part of the MDLZ story. Earlier this year,
we wrote a note entitled, Maybe Dont Love Me Tender, (link) in which we
discussed our belief MDLZ should not tender much of its outstanding debt early.
And to date, MDLZ has done just thatnot tender for its debt. But this leaves the
opportunity ahead of us, because much of the companys debt (roughly 22%)
matures over the next 18 months. As the company does this, it likely will replace
much of the retiring debt with new, lower coupon debt, in our opinion, which will
reduce interest expense and raise EPS.
Updating our thoughts on the MDLZ/Peltz situation. We recently wrote a note
entitled Peltz White Paper Preview Driving Shareholder Value Via Margin
Enhancement (link), in which we laid out the case for margin enhancement at the
company. We have an update to our thoughts since this note was published: We no
longer are confident that Mr. Peltzs Trian Funds will publish a white paper on
MDLZ. Historically, Mr. Peltz has saved his white paper ammo for proxy battles
when he wants to get a board seat but feels resistance from the company. Our sense
from speaking with MDLZ representatives, however, is that a proxy fight is not
assured; therefore, we infer that it is possible Mr. Peltz and Trians representatives
may get board seats without much of a struggle. We of course do not know for sure
what will occur: We merely want to raise the possibility of a less confrontational
relationship between Trian and MDLZ than perhaps is expected by some observers.
On the one hand, the absence of a white paper would take away a potentially positive
catalyst from shorter-horizon investors; on the other hand, the presence of strong
board members with Mr. Peltz's ear could be taken as a longer-term positive by the
Street, we believe.
44
17 September 2013
Ken Goldman
(1-212) 622-0359
To be conservative, we now model less than 5% top line growth this year
(4.9%). At a recent competitor conference, CFO Dave Brearton said coffee was
even a bigger wildcard than the company expected a month prior. We are not sure
how to interpret this comment, but one way is to see it as a warning not to expect as
strong 2H13 sales as expected. We thus now model 4.9% to be conservative. Keep in
mind that lower coffee probably provides an EBITDA benefit.
Adjusting estimates. We maintain 2013E at $1.52 (consensus $1.55) to account for
currency headwinds, though we shift 2c of EPS into 4Q from 3Q. We raise 2014E to
$1.71 from $1.69 (consensus $1.72) to account for the possibility of higher cocoa
costs being passed on (and assuming little elasticity). We introduce 2015E at $1.94
(consensus $1.91).
Mondelz International, Inc. (Overweight; Price Target: $38.00)
Investment Thesis
We are Overweight MDLZ. We believe over time, the companys presence in strong
categories (snacking, mostly) and emerging markets growth will lead to outsized
EBITDA and share price growth. We also see an opportunity to possibly improve
SG&A margins more than management has stated.
Valuation
EV/EBITDA above the group mean reasonably reflect MDLZs better than
average growth profile and margin opportunities. At these multiples and using our
2015 estimates, we come to fair value as of December 2014 of $38. Thus we
establish a December 2014 price target of $38; our previous 2013 target was $35.
MDLZ Valuation and Price Target
P/E Multiple
* 2015E EPS 1.96
EV/EBI TDA Multiple
* 2015E EBITDA 6,359
- 2015E Net Debt 15,627
2015E Shares Outstanding 1,710
Current Price 31.86
45
17 September 2013
Ken Goldman
(1-212) 622-0359
1) Gum category trends may worsen, 2) activist-style investors currently in the stock
(e.g., Nelson Peltz) may sell their positions, 3) further execution missteps may occur.
46
17 September 2013
Ken Goldman
(1-212) 622-0359
TreeHouse Foods Inc.
Neutral
Company Data
Price ($) 69.26
52-week Range ($) 74.64-49.83
Fiscal Year End Dec
Shares O/S (mn) 37
TreeHouse Foods Inc. (THS;THS US)
FYE Dec 2011A 2012A 2013E 2014E
(Prev)
2014E
(Curr)
2015E
EPS (Operating) ($)
Q1 (Mar) 0.59 0.63 0.74A 0.91 0.94 1.02
Q2 (Jun) 0.43 0.60 0.65A 0.88 0.87 0.93
Q3 (Sep) 0.85 0.70 0.77 0.85 0.85 0.92
Q4 (Dec) 0.85 0.86 0.99 0.97 0.97 1.04
FY 2.72 2.79 3.15 3.62 3.63 3.92
Bloomberg EPS FY ($) 2.75 2.78 3.12 - 3.56 3.97
THS is a well-run business in a growing category (private label). On one hand, it
is possible that our estimates are too light, given the potential for greater accretion
from recent deals. On the other hand (and this is why we stay Neutral), THS has a
relatively low organic revenue growth profile than most companies we cover. There
also is a possibility that branded players will promote more heavily this winter, thus
pressuring price gaps versus private label.
Adjusting estimates. We maintain 2013E at $3.15 (consensus $3.12). We lift 2014E
to $3.63 by a penny from $3.62 (consensus $3.56) .We introduce 2015E at $3.92
(consensus $3.97).
TreeHouse Foods Inc. (Neutral; Price Target: $76.00)
Investment Thesis
We are Neutral THS. We are favorable to the story in general and think single serve
coffee will continue to work well. But with the stock trading well over 20x NTM
EPS, we think the valuation is full.
Valuation
EV/EBITDA a bit below the group averages reasonably reflect THSs slimmer
than average sales growth and margin profile. Based on our valuation methodology
in the figure below, we establish a December 2014 price target of $76; our previous
December 2013 estimate was $74 (note that we are lowering multiples across food
today):
47
17 September 2013
Ken Goldman
(1-212) 622-0359
THS Valuation and Price Target
Upside: 1) Commodity costs may fall, 2) single serve coffee may do better than we
expect, 3) acquisition accretion guidance may be conservative. Downside: 1) commodity
costs may rise, 2) private label food price gaps may narrow again, 3) acquisition
execution issues could arise.
P/E Multiple
* CY15E EPS 3.92
EV/EBI TDA Multiple
* CY15E EBITDA 401
= Fair Value: EV/EBI TDA Multiple (Dec 14) 87.55
Current Price 69.82
Dividend Yield 0.0%
48
17 September 2013
Ken Goldman
(1-212) 622-0359
WhiteWave Foods
Overweight
Company Data
Price ($) 19.73
52-week Range ($) 20.19-14.22
Fiscal Year End Dec
Shares O/S (mn) 173
WhiteWave Foods Company (WWAV;WWAV US)
FYE Dec 2011A 2012A 2013E 2014E
(Prev)
2014E
(Curr)
2015E
EPS Reported ($)
Q1 (Mar) 0.10 0.13 0.16A 0.20 0.20 0.23
Q2 (Jun) 0.10 0.13 0.16A 0.18 0.18 0.21
Q3 (Sep) 0.13 0.16 0.18 0.22 0.22 0.25
Q4 (Dec) 0.13 0.18 0.20 0.24 0.24 0.28
FY 0.46 0.60 0.71 0.84 0.83 0.98
Bloomberg EPS FY ($) 0.53 0.59 0.71 - 0.83 0.98
WhiteWave remains one of our favorite stories in our packaged food coverage.
We are establishing a December 2014 price target of $24, which implies 22% upside
between now and the end of next year. We do not think our valuation multiples (23x
P/E, 13x EV/EBITDA) are unreasonable for a company growing the top line nearly
10% a year and the bottom line over 15%.
WhiteWave continues to post a very strong top line (few food/beverage
companies can boast ~10% each quarter), and we believe this figure has a chance
to accelerate next year when the company perhaps may launch a series of center store
products (mac & cheese, e.g.) with the Horizon Organic brand. We believe this
launch has a good chance to be successful (see our downgrade of BNNY which
partially took place as a result of our concern over competition).
Margin growth to accelerate. Somewhat buried in managements recent comments
is confidence that the operating margin, which should grow ~50 bps on a run rate
basis each year, likely will grow closer to 70-80 bps/year on average over the next
two years. A 10% top line plus a margin growth acceleration story spells Overweight
for us. We appreciate that the stock is not cheap; however, we see earnings beats as
more than possible especially given WWAVs underappreciated exposure to Europe,
and we do not think valuation is out of line given growth.
We introduce 2015E EPS of $0.98. Our other estimates are largely unchanged.
WhiteWave Foods (Overweight; Price Target: $24.00)
Investment Thesis
We are Overweight the WWAV shares. We see continued strong growth in creamers
thanks to in-home coffee trends, continued health in the organic milk category (with
minimal cost inflation for now), and further upside to the plant-based beverage
category. We also believe, per managements comments, that WWAV is actively
seeking acquisitions in the refrigerated aisle with which to grow EBITDA. Lastly, we
note that margin growth is set to accelerate over the next two years.
Valuation
EV/EBITDA a bit below HAIN because of a slightly lower distribution opportunity
reasonably reflect WWAVs better than average growth profile. Using our 2015
49
17 September 2013
Ken Goldman
(1-212) 622-0359
estimates, we come to $24 fair value as of December 2014. Thus we establish a
December 2014 price target of $24; our previous December 2013 target was $22.
WWAV Valuation and Price Target
1) Commodity costs may rise, 2) new innovation may not be as strong as prior
efforts, 3) an economic slowdown could impair growth of some of WWAV's higher-
priced items (e.g., organic milk).
P/E Multiple
* CY15E EPS 0.98
EV/EBI TDA Multiple
* CY15E EBITDA 385
Fair Value: Dec-14 (rounded) 24.00
Current Price 19.39
Dividend Yield 0.0%
50
17 September 2013
Ken Goldman
(1-212) 622-0359
Annie's, Inc.: Summary of Financials
Income Statement - Annual FY13A FY14E FY15E Income Statement - Quarterly 1Q14A 2Q14E 3Q14E 4Q14E
Revenues 171 204 236 Revenues 39A 57 46 62
Cost of revenue (103) (124) (143) Cost of revenue (24)A (36) (27) (37)
Gross Profit 68 80 93 Gross Profit 15A 21 19 25
Other Operating Expenses - - - Other Operating Expenses - - - -
Operating Income 24 29 35 Operating Income 4A 9 6 11
EBITDA 25 31 36 EBITDA 4A 9 7 11
Interest, net (0) (0) (0) Interest, net 0A (0) (0) (0)
Pretax Income 23 29 35 Pretax Income 4A 8 6 11
Taxes (9) (12) (14) Taxes (1)A (3) (2) (4)
Tax Rate 39.6% 40.4% 40.5% Tax Rate 39.8%A 40.5% 40.5% 40.5%
Net income - operating 14 17 21 Net income - operating 2A 5 4 6
Diluted Shares Outstanding 18 18 17 Diluted Shares Outstanding 18A 18 18 18
Operating EPS 0.80 0.99 1.19 Operating EPS 0.13A 0.29 0.21 0.36
Balance Sheet and Cash Flow Data FY13A FY14E FY15E Ratio Analysis and Valuation FY13A FY14E FY15E
Cash and Equivalents 5 19 37 Gross margin 39.5% 39.2% 39.4%
Accounts receivable 20 13 15 SGA/sales 25.7% 24.8% 24.6%
Inventories 15 22 26 EBIT margin 13.8% 14.4% 14.8%
Current assets 48 61 84 EBITDA Margin 14.4% 15.0% 15.4%
PP&E 6 6 7 EBITDA growth 22.5% 24.5% 18.9%
Goodwill 31 32 32 EBIT Growth 22.4% 24.9% 19.2%
Intangibles - - - Net income growth - operating 22.4% 22.3% 19.5%
Total assets 90 102 125 EPS growth - operating 13.1% 23.4% 20.8%
Short-term Debt 0 0 0 Working capital as % of sales 0.2 0.3 0.3
Current Liabilities 16 9 10 Net debt 2 (19) (37)
Long-term Debt 7 0 0 Net debt/EBITDA 8.4% (62.9%) (100.2%)
Total Liabilities 23 10 11 Net debt/Capital 3.1% (26.6%) (46.8%)
Shareholders' Equity 66 92 115
Net Income (including charges) 12 17 21
D&A 1 1 1
Other adjustments - - -
Changes in Working Capital 2 1 (5)
Cash flow from Operations 9 22 20
Capex (3) (1) (3)
Free Cash Flow 6 21 17
Free Cash Flow/Share 0.34 1.18 1.00
Cash flow from Investing (3) (1) (3)
Cash flow from Financing (2) (6) 0
Share buybacks (19) 0 0
Dividends 0 0 0
Source: Company reports and J.P. Morgan estimates.
Note: $ in millions (except per-share data).Fiscal year ends Mar
51
17 September 2013
Ken Goldman
(1-212) 622-0359
Campbell Soup Company: Summary of Financials
Income Statement - Annual FY13A FY14E FY15E Income Statement - Quarterly 1Q14E 2Q14E 3Q14E 4Q14E
Revenues 8,052 8,512 8,517 Revenues 2,302 2,270 2,011 1,928
Cost of goods sold (5,049) (5,357) (5,359) Cost of revenue (1,429) (1,434) (1,274) (1,220)
Gross Profit 3,003 3,155 3,157 Gross Profit 873 836 738 708
SG&A (1,752) (1,852) (1,838) Other Operating Expenses (445) (486) (455) (465)
LFL Operating Income 1,232 1,303 1,319 Operating Income 428 349 283 243
LFL EBITDA 1,649 1,723 1,759 EBITDA 533 454 388 348
Interest, net (125) (118) (101) Interest, net (33) (30) (28) (27)
Pretax Income 1,107 1,185 1,218 Pretax Income 395 319 254 216
Equity income - - - Equity income - - - -
Income taxes (332) (373) (384) Income taxes (125) (101) (80) (68)
Tax Rate 30.0% 31.5% 31.5% Tax Rate 31.5% 31.5% 31.5% 31.5%
Net income - operating 784 821 842 Net income - operating 273 222 176 150
Non-operating income / (expense) - - - Non-operating income / (expense) - - - -
Net income - reported (GAAP) 784 821 842 Net income - reported (GAAP) 273 222 176 150
Diluted shares outstanding 317 317 310 Diluted shares outstanding 317 317 317 317
EPS (LFL) 2.48 2.59 2.72 EPS (LFL) 0.86 0.70 0.56 0.47
EPS - reported (GAAP) 2.48 2.59 2.72 EPS - reported (GAAP) 0.86 0.70 0.56 0.47
EPS - consensus (I/B/E/S) 2.61 2.60 2.75 EPS - consensus (I/B/E/S) 0.87 0.69 0.57 0.46
Cash and Equivalents 333 1,225 874 Reported sales growth 12.2% 5.7% 0.1%
Accounts receivable 603 675 639 organic growth - - -
Inventories 861 964 913 volume change - - -
Current assets 1,959 3,025 2,588 price / mix change - - -
FX - - -
PP&E 2,260 2,913 2,825 Other - - -
Goodwill 3,318 3,318 3,318
Intangibles - - - Gross margin 37.3% 37.1% 37.1%
Total assets 7,668 9,387 8,862 SGA / sales 21.8% 21.8% 21.6%
EBIT margin 15.3% 15.3% 15.5%
Short-term Debt 1,909 1,909 1,909 EBITDA Margin 20.5% 20.2% 20.7%
Current Liabilities 3,282 3,309 3,273 Return on equity (ROE) 74.4% 46.8% 35.1%
Long-term Debt 2,544 2,041 1,341
Total Liabilities 7,569 7,093 6,357 EBITDA growth 15.2% 4.5% 2.1%
EBIT Growth 5.4% 5.8% 1.2%
Shareholders' Equity 1,210 2,294 2,505 Net income growth - operating 6.5% 4.7% 2.6%
EPS growth - operating 7.4% 4.6% 5.0%
D&A 417 420 440
Other adjustments 170 169 169 Working capital as % of sales NM NM NM
Changes in Working Capital (44) (100) 50
Cash flow from Operations 1,288 1,309 1,501 Net debt 4,120 2,725 2,376
Net debt / EBITDA 249.8% 158.2% 135.1%
Capex (336) (352) (352) Net debt / Capital 77.3% 54.3% 48.7%
Free Cash Flow 1,044 1,038 1,218
Free Cash Flow/Share 3.30 3.28 3.94 P/E 17.1 16.3 15.5
Cash flow from Investing (2,155) (331) (352) Enterprise value / EBITDA 10.6 9.4 9.0
Cash flow from Financing 1,281 (500) (1,500) Enterprise value / revenues 2.2 1.9 1.9
Share buybacks (139) 0 (800) FCF yield 7.8% 7.8% 9.3%
Dividends - - - Dividend yield - - -
Note: $ in millions (except per-share data).Fiscal year ends Jul
52
17 September 2013
Ken Goldman
(1-212) 622-0359
ConAgra Foods: Summary of Financials
Cost of revenue (11,944) (12,889) (12,466) Cost of revenue (3,376) (3,295) (3,114) (3,105)
Gross Profit 3,547 3,860 3,872 Gross Profit 879 1,039 1,037 905
Operating Income 1,578 1,725 1,791 Operating Income 326 476 482 441
EBITDA 2,023 2,309 2,375 EBITDA 472 622 628 587
Taxes (440) (449) (481) Taxes (77) (128) (129) (116)
Tax Rate 33.8% 34.0% 34.0% Tax Rate 34.0% 34.0% 34.0% 34.0%
Net income - operating 892 982 1,101 Net income - operating 159 268 291 265
Diluted Shares Outstanding 415 426 426 Diluted Shares Outstanding 426 426 426 426
Operating EPS 2.15 2.30 2.58 Operating EPS 0.37 0.63 0.68 0.62
Accounts receivable 1,286 1,123 1,136 SGA/sales 12.7% 12.7% 12.7%
Inventories 2,394 2,068 2,080 EBIT margin 10.2% 10.3% 11.0%
Current assets 4,380 4,525 4,152 EBITDA Margin 13.1% 13.8% 14.5%
PP&E 3,859 3,925 3,941 EBITDA growth 19.0% 14.1% 2.9%
Goodwill 8,451 8,451 8,451 EBIT Growth 18.9% 9.3% 3.9%
Intangibles 3,422 3,422 3,422 Net income growth - operating 16.0% 10.1% 12.1%
Total assets 20,405 20,617 20,259 EPS growth - operating 16.6% 7.2% 12.1%
Current Liabilities 3,401 3,197 3,204 Net debt 9,406 8,071 7,320
Long-term Debt 8,887 8,187 7,037 Net debt/EBITDA 464.9% 349.6% 308.2%
Total Liabilities 14,042 13,138 11,995 Net debt/Capital 65.6% 51.9% 47.0%
Shareholders' Equity 4,932 7,479 8,264
Net Income (including charges) 786 982 1,101
D&A 445 584 584
Other adjustments 83 100 100
Changes in Working Capital 98 285 (18)
Cash flow from Operations 1,412 1,951 1,767
Capex (458) (650) (600)
Free Cash Flow 1,154 1,567 1,416
Cash flow from Investing (5,466) (200) (600)
Cash flow from Financing 3,920 (1,116) (1,566)
Share buybacks (245) 0 0
Dividends (401) (416) (416)
Note: $ in millions (except per-share data).Fiscal year ends May
53
17 September 2013
Ken Goldman
(1-212) 622-0359
General Mills: Summary of Financials
Cost of revenue (11,359) (11,514) (11,713) Cost of revenue (2,648) (3,104) (2,882) (2,879)
Gross Profit 6,415 6,634 6,844 Gross Profit 1,622 1,835 1,585 1,591
Other Operating Expenses (1) 0 0 Other Operating Expenses 0 0 0 0
Operating Income 2,873 3,024 3,199 Operating Income 738 914 706 666
EBITDA 3,461 3,647 3,879 EBITDA 894 1,069 862 822
Taxes (829) (870) (918) Taxes (212) (268) (201) (189)
Tax Rate 32.4% 32.2% 32.0% Tax Rate 32.2% 32.2% 32.2% 32.2%
Net income - operating 1,789 1,903 2,025 Net income - operating 461 590 439 412
Short-term Debt 2,043 2,043 2,043 Working capital as % of sales NM NM NM
Net Income (including charges) 1,893 1,903 2,025
D&A 588 623 680
Other adjustments (26) 26 28
Changes in Working Capital 471 (20) (41)
Capex (614) (700) (620)
Free Cash Flow 2,550 2,051 2,297
Cash flow from Financing (1,140) (2,495) (1,638)
Share buybacks (1,045) (800) (600)
Dividends (868) (1,045) (1,169)
Note: $ in millions (except per-share data).Fiscal year ends May
54
17 September 2013
Ken Goldman
(1-212) 622-0359
Hain Celestial Group: Summary of Financials
Revenues 1,735 2,011 2,153 Revenues 474 522 510 505
Cost of revenue (1,255) (1,446) (1,542) Cost of revenue (346) (370) (364) (366)
Gross Profit 479 565 610 Gross Profit 128 153 146 139
Operating Income 195 243 278 Operating Income 48 67 70 58
EBITDA 235 296 334 EBITDA 61 81 83 72
Pretax Income 175 219 256 Pretax Income 42 61 64 53
Taxes (57) (73) (85) Taxes (14) (20) (21) (17)
Tax Rate 32.6% 33.2% 33.2% Tax Rate 33.2% 33.2% 33.2% 33.2%
Current assets 575 688 722 EBITDA Margin 13.5% 14.7% 15.5%
Current Liabilities 274 295 314 Net debt 625 516 319
Long-term Debt 653 616 416 Net debt/EBITDA 266.2% 174.0% 95.4%
Total Liabilities 1,077 1,061 880 Net debt/Capital 34.2% 28.4% 17.8%
D&A 40 53 56
Changes in Working Capital (47) (20) (18)
Capex (72) (20) (20)
Cash flow from Financing 296 (100) (200)
Share buybacks - - -
Dividends - - -
Note: $ in millions (except per-share data).Fiscal year ends Jun
55
17 September 2013
Ken Goldman
(1-212) 622-0359
Hershey: Summary of Financials
Income Statement - Annual FY12A FY13E FY14E Income Statement - Quarterly 1Q13A 2Q13A 3Q13E 4Q13E
Revenues 6,644 7,106 7,550 Revenues 1,827A 1,509A 1,888 1,882
Cost of revenue (3,735) (3,841) (4,020) Cost of revenue (976)A (789)A (1,036) (1,040)
Gross Profit 2,909 3,265 3,530 Gross Profit 851A 720A 851 843
Operating Income 1,229 1,382 1,479 Operating Income 402A 276A 369 335
EBITDA 1,439 1,588 1,707 EBITDA 457A 326A 419 386
Interest, net (96) (93) (92) Interest, net (24)A (21)A (24) (24)
Pretax Income 1,133 1,290 1,388 Pretax Income 379A 254A 345 311
Taxes (395) (451) (482) Taxes (130)A (91)A (121) (109)
Tax Rate 34.8% 34.9% 34.8% Tax Rate 34.3%A 35.7%A 35.0% 35.0%
Net income - operating 738 839 905 Net income - operating 249A 164A 224 202
Diluted Shares Outstanding 228 226 223 Diluted Shares Outstanding 228A 227A 226 225
Operating EPS 3.23 3.71 4.06 Operating EPS 1.09A 0.72A 0.99 0.90
Long-term Debt 1,531 1,788 1,788 Net debt/EBITDA 0.8 0.7 0.7
D&A 210 199 228
Cash flow from Operations 1,095 966 1,101
Capex (278) (288) (328)
Cash flow from Financing (587) (695) (741)
Share buybacks (508) (509) (500)
Dividends (341) (402) (455)
Note: $ in millions (except per-share data).Fiscal year ends Dec
56
17 September 2013
Ken Goldman
(1-212) 622-0359
Hillshire Brands: Summary of Financials
Revenues 3,920 4,001 4,071 Revenues 952 1,052 961 1,035
Cost of revenue (2,747) (2,794) (2,835) Cost of revenue (679) (719) (662) (733)
Gross Profit 1,173 1,206 1,235 Gross Profit - - - -
Operating Income 363 358 380 Operating Income 72 111 91 83
EBITDA 511 510 536 EBITDA 110 149 129 121
Pretax Income 322 317 340 Pretax Income 62 101 81 73
Taxes (110) (111) (119) Taxes (22) (35) (28) (26)
Tax Rate 34.0% 35.0% 35.0% Tax Rate 35.0% 35.0% 35.0% 35.0%
Current assets 1,106 1,022 931 EBITDA Margin 13.0% 12.7% 13.2%
PP&E 818 802 794 EBITDA growth 10.7% (0.3%) 5.2%
Goodwill 348 348 348 EBIT Growth 12.6% (1.5%) 6.2%
Intangibles 121 121 121 Net income growth - operating 16.0% (2.9%) 7.0%
Current Liabilities 671 669 671 Net debt 551 670 764
Long-term Debt 932 951 951 Net debt/EBITDA 107.8% 131.5% 142.5%
D&A 166 152 156
Other adjustments (55) (40) (40)
Capex (135) (136) (148)
Cash flow from Financing (45) (284) (281)
Share buybacks 0 (200) (200)
Dividends (46) (84) (81)
Note: $ in millions (except per-share data).Fiscal year ends Jun
57
17 September 2013
Ken Goldman
(1-212) 622-0359
J.M. Smucker Co.: Summary of Financials
Revenues 5,898 5,850 5,991 Revenues 1,351A 1,615 1,537 1,347
Cost of Goods Sold (3,859) (3,713) (3,773) Cost of Goods Sold (855)A (1,043) (974) (840)
Gross Profit 2,039 2,137 2,218 Gross Profit 496A 572 563 507
Operating income 971 1,024 1,078 Operating income 221A 281 282 240
Interest, Net (94) (91) (86) Interest, Net (24)A (23) (22) (22)
Pretax Income 879 934 994 Pretax Income 197A 259 260 218
Taxes (294) (323) (343) Taxes (65)A (91) (91) (76)
Net income 585 611 651 Net income 132A 168 169 142
Diluted Shares Outstanding 109 105 103 Diluted Shares Outstanding 106A 105 105 104
EPS - Operating 5.38 5.82 6.31 EPS - Operating 1.24A 1.60 1.62 1.37
EPS - Consensus 5.24 5.83 6.31 EPS - Consensus 1.20A 1.59 1.61 1.38
EBITDA 1,212 1,268 1,326 EBITDA 282A 342 343 301
Per Share - - - Per Share - - - -
Cash and Equivalents 256 349 353 Sales growth
Accounts Receivable 314 315 326 Organic - - -
Inventories 946 928 968 Volume - - -
Current Assets 1,595 1,648 1,703 Price and Mix - - -
Currency - - -
PP&E 1,143 1,196 1,168 Acquisitions - - -
Goodwill and Intangibles 6,142 6,115 6,115
Gross Margin 34.6% 36.5% 37.0%
Total Assets 9,032 9,109 9,136 SG&A Margin 18.2% 19.0% 19.0%
EBIT Margin 16.5% 17.5% 18.0%
Short-term Debt 50 0 0 EBITDA Margin 20.5% 21.7% 22.1%
Current Liabilities 597 555 566
ROCE 9.0% 9.3% 9.7%
Long-term Debt 1,968 2,102 2,002 ROA 6.5% 6.7% 7.1%
Total Liabilities 3,883 3,946 3,857 ROE 11.4% 11.8% 12.5%
Shareholders' Equity 5,149 5,163 5,279 EBIT Growth 8.7% 5.4% 5.3%
EBITDA Growth 10.1% 4.6% 4.5%
Net Income (GAAP) 585 611 651 Net Income Growth 9.3% 4.4% 6.6%
D&A 251 245 248 EPS Growth 13.7% 8.3% 8.4%
Changes in Working Capital 35 48 (40) Total Debt 2,018 2,102 2,002
Cash from Operations 856 923 883 Debt to-EBITDA 1.7 1.7 1.5
Capital Expenditures (207) (276) (220) P/E 20.1 18.5 17.1
Enterprise Value to EBITDA 1.5 1.4 1.2
Free Cash Yield 6.1% 6.2% 6.5%
Cash from Investing (186) (282) (220) Dividend Yield - - -
Cash from Financing (641) (545) (659)
Dividends Paid (223) (240) (259)
Per Share 6.54 6.73 6.97
Note: $ in millions (except per-share data).Fiscal year ends Apr
58
17 September 2013
Ken Goldman
(1-212) 622-0359
Kellogg: Summary of Financials
Cost of revenue (8,554) (9,076) (9,197) Cost of revenue (2,414)A (2,228)A (2,250) (2,184)
Gross Profit 5,643 5,738 5,888 Gross Profit 1,447A 1,486A 1,408 1,397
Operating Income 2,013 2,171 2,285 Operating Income 577A 592A 506 497
EBITDA 2,461 2,623 2,745 EBITDA 690A 705A 619 610
Taxes (512) (559) (598) Taxes (145)A (157)A (130) (128)
Net income - operating 1,264 1,362 1,463 Net income - operating 364A 367A 318 313
Goodwill 7,412 7,366 7,366 EBIT Growth (2.9%) 7.9% 5.2%
Intangibles - - - Net income growth - operating (2.7%) 7.7% 7.5%
Total assets 15,243 15,289 15,334 EPS growth - operating (1.3%) 5.5% 7.4%
Short-term Debt 1,820 1,429 1,429 Working capital as % of sales NM NM NM
Net Income (including charges) 961 1,294 1,463
D&A 448 452 460
Other adjustments 188 25 (172)
Capex (3,201) (510) (400)
Free Cash Flow (1,257) 1,217 1,477
Free Cash Flow/Share (3.50) 3.32 4.02
Cash flow from Financing 1,317 (950) (1,272)
Share buybacks (63) (544) 0
Dividends (622) (640) (672)
59
17 September 2013
Ken Goldman
(1-212) 622-0359
Kraft Foods Group: Summary of Financials
Revenues 18,339 18,660 19,136 Revenues 4,546A 4,735 4,603 4,776
Cost of goods sold (12,499) (12,457) (12,821) Cost of revenue (3,043)A (3,130) (3,084) (3,200)
Gross Profit 5,840 6,203 6,315 Gross Profit 1,503A 1,605 1,519 1,576
SG&A (3,029) (3,023) (2,838) Other Operating Expenses (632)A (789) (704) (898)
LFL Operating Income 2,670 3,096 3,476 Operating Income 809A 794 815 678
LFL EBITDA 3,098 3,504 3,896 EBITDA 911A 896 917 780
Interest, net (258) (514) (521) Interest, net (123)A (130) (130) (130)
Pretax Income 2,453 2,583 2,955 Pretax Income 686A 664 684 548
Equity income 41 0 0 Equity income 0A 0 0 0
Income taxes (812) (880) (1,020) Income taxes (230)A (206) (246) (197)
Net income - operating 1,641 1,703 1,936 Net income - operating 456A 458 438 351
Net income - reported (GAAP) 1,641 1,703 1,936 Net income - reported (GAAP) 456A 458 438 351
Diluted shares outstanding 596 599 594 Diluted shares outstanding 597A 599 599 599
EPS (LFL) 2.75 2.85 3.26 EPS (LFL) 0.76A 0.76 0.73 0.59
EPS - reported (GAAP) 2.75 2.85 3.26 EPS - reported (GAAP) 0.76A 0.76 0.73 0.59
EPS - consensus (I/B/E/S) 2.88 2.88 3.22 EPS - consensus (I/B/E/S) 0.64A 0.67 0.70 0.60
Cash and Equivalents 1,255 1,258 1,265 Reported sales growth (1.7%) 1.7% 2.5%
Accounts receivable 1,089 1,073 1,100 organic growth 0.0% 2.2% 2.4%
Inventories 1,928 1,744 1,795 volume change (2.8%) 1.9% 1.5%
Current assets 4,823 4,609 4,694 price / mix change 2.8% 0.3% 0.9%
FX - - -
PP&E 4,204 4,212 4,312 Other - - -
Goodwill 13,977 13,906 13,906
Intangibles 325 311 311 Gross margin 31.8% 33.2% 33.0%
EBIT margin 14.6% 16.6% 18.2%
Long-term Debt 9,966 9,969 9,969
Total Liabilities 19,757 18,833 19,012 EBITDA growth (2.9%) 13.1% 11.2%
EBIT Growth (5.6%) 16.0% 12.3%
Shareholders' Equity 3,572 4,205 4,210 Net income growth - operating (7.5%) 3.8% 13.7%
EPS growth - operating (8.4%) 3.3% 14.5%
D&A 428 408 420
Other adjustments 187 (467) (224) Working capital as % of sales 0.1 0.1 0.1
Changes in Working Capital 144 17 11
Net debt / EBITDA 281.3% 248.6% 223.4%
Free Cash Flow 2,768 1,427 2,045
Cash flow from Investing (422) (600) (520) Enterprise value / EBITDA 13.3 11.7 10.5
Cash flow from Financing (1,358) (1,195) (1,588) Enterprise value / revenues 2.2 2.2 2.1
Share buybacks - - - FCF yield 8.6% 4.4% 6.3%
60
17 September 2013
Ken Goldman
(1-212) 622-0359
McCormick & Co., Inc.: Summary of Financials
Revenues 4,014 4,218 4,418 Revenues 934A 1,003A 1,042 1,240
Cost of Goods Sold (2,396) (2,513) (2,624) Cost of Goods Sold (573)A (608)A (626) (706)
Operating income 578 611 649 Operating income 112A 116A 153 230
Interest, Net (55) (57) (56) Interest, Net (14)A (14)A (16) (14)
Pretax Income 526 556 593 Pretax Income 99A 103A 137 216
Taxes (140) (161) (172) Taxes (28)A (31)A (40) (63)
Net income 408 420 449 Net income 76A 79A 105 161
EPS - Operating 3.04 3.14 3.41 EPS - Operating 0.57A 0.59A 0.78 1.21
EPS - Consensus 3.08 3.16 3.49 EPS - Consensus 0.56A 0.61A 0.79 1.22
EBITDA 681 714 753 EBITDA 138A 142A 178 256
Accounts Receivable 466 504 522 Organic - - -
Inventories 615 635 654 Volume - - -
Current Assets 1,285 1,413 1,514 Price and Mix - - -
Currency - - -
PP&E 547 563 549 Acquisitions - - -
Goodwill and Intangibles 2,019 2,108 2,108
Gross Margin 40.3% 40.4% 40.6%
EBIT Margin 14.4% 14.5% 14.7%
Current Liabilities 1,188 1,285 1,296
ROCE 14.8% 14.3% 14.2%
Long-term Debt 779 777 777 ROA 9.9% 9.8% 10.1%
Shareholders' Equity 1,700 1,877 1,953 EBIT Growth 7.0% 5.7% 6.2%
D&A 103 103 104 EPS Growth 9.0% 3.5% 8.4%
Changes in Working Capital (70) (146) (25) Total Debt 1,172 1,328 1,328
Cash from Financing (324) (93) (325)
Dividends Paid (165) (178) (175)
Per Share 2.87 2.28 3.25
Note: $ in millions (except per-share data).Fiscal year ends Nov
61
17 September 2013
Ken Goldman
(1-212) 622-0359
Mead Johnson Nutrition: Summary of Financials
Cost of revenue (1,485) (1,565) (1,679) Cost of revenue (391)A (384)A (388) (401)
Other Operating Expenses - 0 0 Other Operating Expenses (12)A (18)A 0 0
Operating Income 907 939 1,009 Operating Income 237A 221A 229 222
EBITDA 984 1,027 1,105 EBITDA 257A 243A 252 245
Taxes (204) (221) (230) Taxes (60)A (56)A (53) (51)
Cash and Equivalents 1,042 979 451 Gross margin 61.9% 62.1% 61.7%
Intangibles 130 115 115 Net income growth - operating 14.0% 4.9% 10.0%
Current Liabilities 1,370 1,187 1,218 Net debt 857 775 803
Long-term Debt 1,523 1,569 1,069 Net debt/EBITDA 0.9 0.8 0.7
D&A 77 88 96
Capex (124) (257) (180)
Cash flow from Financing (268) (543) (1,112)
Share buybacks (155) (156) (320)
Dividends (237) (267) (292)
62
17 September 2013
Ken Goldman
(1-212) 622-0359
WhiteWave Foods: Summary of Financials
Revenues 2,306 2,523 2,758 Revenues 608A 616A 637 661
Cost of goods sold (1,478) (1,611) (1,745) Cost of revenue (390)A (392)A (404) (425)
Gross Profit 828 912 1,012 Gross Profit 219A 224A 233 236
SG&A (655) (708) (769) Other Operating Expenses (171)A (178)A (181) (178)
LFL Operating Income 173 204 243 Operating Income 47A 46A 52 59
LFL EBITDA 266 284 331 EBITDA 68A 66A 72 78
Income taxes (46) (63) (75) Income taxes (15)A (13)A (16) (18)
Non-operating income / (expense) 0 0 0 Non-operating income / (expense) 0A 0A 0 0
Net income - reported (GAAP) 104 123 147 Net income - reported (GAAP) 28A 28A 31 36
Diluted shares outstanding 173 174 176 Diluted shares outstanding 173A 173A 176 176
EPS (LFL) 0.60 0.71 0.83 EPS (LFL) 0.16A 0.16A 0.18 0.20
EPS - reported (GAAP) 0.60 0.71 0.83 EPS - reported (GAAP) 0.16A 0.16A 0.18 0.20
EPS - consensus (I/B/E/S) 0.59 0.71 0.83 EPS - consensus (I/B/E/S) 0.15A 0.16A 0.18 0.21
Cash and Equivalents 69 57 30 Reported sales growth 12.8% 9.4% 9.3%
Accounts receivable 124 165 180 organic growth - 0.0% 9.2%
Inventories 147 170 184 volume change - 0.0% 8.2%
Current assets 383 392 394 price / mix change - 0.0% 1.0%
FX - - -
PP&E 625 694 766 Other - - -
Goodwill 766 763 763
Intangibles 395 392 392 Gross margin 35.9% 36.2% 36.7%
EBIT margin 7.5% 8.1% 8.8%
Short-term Debt - - - EBITDA Margin 11.5% 11.2% 12.0%
Current Liabilities 323 340 367 Return on equity (ROE) 10.8% 14.5% 14.8%
Long-term Debt 766 722 622
Total Liabilities 1,383 1,324 1,250 EBITDA growth 25.8% 6.8% 16.5%
EBIT Growth 21.8% 18.1% 18.7%
Shareholders' Equity 785 917 1,065 Net income growth - operating 30.0% 18.4% 19.1%
D&A 74 79 88
Other adjustments - - - Working capital as % of sales 0.0 0.0 0.0
Cash flow from Operations 237 125 233 Net debt 696 665 592
Net debt / EBITDA 262.1% 234.4% 179.1%
Cash flow from Investing (92) (91) (160) Enterprise value / EBITDA 15.5 14.4 12.1
Cash flow from Financing (172) (44) (100) Enterprise value / revenues 1.8 1.6 1.5
Share buybacks - - - FCF yield 4.4% 1.4% 2.5%
63
17 September 2013
Ken Goldman
(1-212) 622-0359
Mondelz International, Inc.: Summary of Financials
Cost of goods sold (21,703) (22,204) (23,172) Cost of revenue (5,502)A (5,364)A (5,370) (5,968)
Gross Profit 13,225 13,399 13,988 Gross Profit 3,242A 3,231A 3,222 3,705
SG&A (8,843) (9,211) (9,211) Other Operating Expenses (2,347)A (2,249)A (2,168) (2,447)
LFL Operating Income 4,383 4,188 4,777 Operating Income 895A 982A 1,054 1,257
LFL EBITDA 5,728 5,252 5,897 EBITDA 1,161A 1,248A 1,320 1,523
Interest, net (1,093) (1,046) (989) Interest, net (274)A (235)A (274) (263)
Income taxes (636) (395) (758) Income taxes (2)A (77)A (62) (253)
Net income - operating 2,627 2,733 3,014 Net income - operating 613A 669A 714 737
Net income - reported (GAAP) 2,627 2,733 3,014 Net income - reported (GAAP) 613A 669A 714 737
Diluted shares outstanding 1,789 1,794 1,754 Diluted shares outstanding 1,798A 1,803A 1,792 1,781
EPS (LFL) 1.47 1.52 1.72 EPS (LFL) 0.34A 0.37A 0.40 0.41
EPS - reported (GAAP) 1.47 1.52 1.72 EPS - reported (GAAP) 0.34A 0.37A 0.40 0.41
EPS - consensus (I/B/E/S) 1.43 1.55 1.72 EPS - consensus (I/B/E/S) 0.33A 0.34A 0.41 0.43
Cash and Equivalents 4,475 709 1,480 Reported sales growth (1.6%) 1.9% 4.4%
Accounts receivable 6,129 6,740 7,122 organic growth 4.3% 4.9% 5.3%
Inventories 3,741 4,380 4,629 volume change 1.1% 3.4% 4.6%
Current assets 15,622 13,166 14,567 price / mix change 3.2% 1.5% 0.7%
FX - - -
PP&E 10,010 9,971 10,451 Other - - -
Goodwill 48,353 47,050 47,050
Intangibles 1,493 1,332 1,332 Gross margin 37.9% 37.6% 37.6%
EBIT margin 12.5% 11.8% 12.9%
Short-term Debt 3,851 3,075 3,075 EBITDA Margin 16.4% 14.8% 15.9%
Long-term Debt 15,574 13,226 14,246
Total Liabilities 43,123 39,000 40,292 EBITDA growth 10.0% (8.3%) 12.3%
EBIT Growth 6.7% (4.4%) 14.0%
Shareholders' Equity 32,355 32,519 33,108 Net income growth - operating 6.8% 4.0% 10.3%
D&A 1,345 1,064 1,120
Other adjustments - - - Working capital as % of sales 0.0 NM 0.0
Changes in Working Capital (1,116) (1,993) (358)
Net debt / EBITDA 261.0% 296.8% 268.6%
Capex (1,610) (1,368) (1,600) Net debt / Capital 31.6% 32.4% 32.4%
Free Cash Flow 3,118 1,259 2,967
Cash flow from Investing (1,687) (1,368) (1,600) Enterprise value / EBITDA 12.5 13.8 12.3
Cash flow from Financing 204 (4,110) (1,405) Enterprise value / revenues 2.1 2.0 2.0
Share buybacks 0 (792) (1,400) FCF yield 5.5% 2.2% 5.4%
Dividends - 0.54 0.58 Dividend yield - 1.7% 1.9%
64
17 September 2013
Ken Goldman
(1-212) 622-0359
TreeHouse Foods Inc.: Summary of Financials
Revenues 2,182 2,324 2,542 Revenues 540A 526A 590 667
Cost of Goods Sold (1,719) (1,789) (1,955) Cost of Goods Sold (420)A (409)A (452) (508)
Gross Profit 463 535 587 Gross Profit 120A 117A 138 159
Operating income 196 221 245 Operating income 51A 49A 55 66
Interest, Net (49) (49) (47) Interest, Net (12)A (12)A (13) (12)
Taxes (42) (54) (62) Taxes (12)A (12)A (13) (17)
Net income 104 118 136 Net income 27A 24A 29 37
EPS - Operating 2.79 3.15 3.63 EPS - Operating 0.74A 0.65A 0.77 0.99
EPS - Consensus 2.78 3.12 3.56 EPS - Consensus 0.70A 0.63A 0.77 0.95
EBITDA 294 336 377 EBITDA 78A 78A 84 97
Accounts Receivable 125 140 144 Organic 3.4% (0.2%) 2.3%
Inventories 347 380 391 Volume 0.2% (0.2%) 2.3%
Current Assets 588 607 643 Price and Mix 3.4% 0.4% 0.1%
Currency (0.2%) (0.5%) (0.2%)
PP&E 425 404 372 Acquisitions 3.0% 6.7% 7.1%
Goodwill and Intangibles - - -
Gross Margin 21.2% 23.0% 23.1%
EBIT Margin 9.0% 9.5% 9.6%
Current Liabilities 187 204 210
ROCE 6.9% 7.0% 7.4%
Long-term Debt 898 973 813 ROA 4.2% 4.5% 5.0%
Shareholders' Equity 1,179 1,277 1,435 EBIT Growth (0.9%) 13.1% 10.6%
D&A 98 115 132 EPS Growth 2.6% 12.7% 15.3%
Changes in Working Capital (4) (42) (9) Total Debt 900 975 815
Cash from Financing (6) 75 (160)
Dividends Paid - - -
Per Share 4.57 4.14 5.70
65
17 September 2013
Ken Goldman
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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report.
Important Disclosures
Market Maker: JPMS makes a market in the stock of Annie's, Inc., Hain Celestial Group, Kraft Foods Group.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Annie's, Inc.,
ConAgra Foods, General Mills, Hershey, Kellogg, McCormick & Co., Inc., WhiteWave Foods within the past 12 months.
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Annie's, Inc., Campbell
Soup Company, ConAgra Foods, General Mills, Hain Celestial Group, Hershey, Hillshire Brands, J.M. Smucker Co., Kellogg, Kraft
Foods Group, McCormick & Co., Inc., Mead Johnson Nutrition, WhiteWave Foods, Mondelz International, Inc., TreeHouse Foods Inc..
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: Annie's, Inc., Campbell Soup Company, ConAgra Foods, General Mills, Hershey, Hillshire Brands, Kellogg, Kraft Foods
Group, McCormick & Co., Inc., Mead Johnson Nutrition, WhiteWave Foods, Mondelz International, Inc..
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: Campbell Soup Company, ConAgra
Foods, General Mills, Hain Celestial Group, Hershey, Hillshire Brands, J.M. Smucker Co., Kellogg, Kraft Foods Group, Mead Johnson
Nutrition, WhiteWave Foods, Mondelz International, Inc., TreeHouse Foods Inc..
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: Campbell Soup Company, ConAgra Foods, General Mills, Hain Celestial Group,
Hershey, Hillshire Brands, J.M. Smucker Co., Kellogg, Kraft Foods Group, McCormick & Co., Inc., Mead Johnson Nutrition,
WhiteWave Foods, Mondelz International, Inc., TreeHouse Foods Inc..
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Annie's,
Inc., Campbell Soup Company, ConAgra Foods, General Mills, Hershey, Hillshire Brands, Kellogg, Kraft Foods Group, McCormick &
Co., Inc., Mead Johnson Nutrition, WhiteWave Foods, Mondelz International, Inc..
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Annie's, Inc., Campbell Soup Company, ConAgra Foods, General Mills, Hershey, Hillshire
Brands, Kellogg, Kraft Foods Group, McCormick & Co., Inc., Mead Johnson Nutrition, WhiteWave Foods, Mondelz International, Inc..
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Campbell Soup Company, ConAgra Foods, General Mills, Hain Celestial Group, Hershey, Hillshire
Brands, J.M. Smucker Co., Kellogg, Kraft Foods Group, Mead Johnson Nutrition, WhiteWave Foods, Mondelz International, Inc.,
TreeHouse Foods Inc..
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan
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Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
66
17 September 2013
Ken Goldman
(1-212) 622-0359
Coverage Universe: Goldman, Ken: Annie's, Inc. (BNNY), Campbell Soup Company (CPB), ConAgra Foods (CAG), Dean Foods
(DF), General Mills (GIS), Hain Celestial Group (HAIN), Hershey (HSY), Hillshire Brands (HSH), J.M. Smucker Co. (SJM), Kellogg
(K), Kraft Foods Group (KRFT), Kroger (KR), McCormick & Co., Inc. (MKC), Mead Johnson Nutrition (MJN), Mondelz International,
Inc. (MDLZ), Roundy's (RNDY), Safeway (SWY), Sanderson Farms, Inc. (SAFM), Smithfield Foods, Inc. (SFD), The Fresh Market
(TFM), TreeHouse Foods Inc. (THS), Tyson Foods (TSN), WhiteWave Foods (WWAV), Whole Foods Market (WFM)
J.P. Morgan Equity Research Ratings Distribution, as of June 28, 2013
Overweight
(buy)
Neutral
(hold)
Underweight
(sell)
J.P. Morgan Global Equity Research Coverage 44% 44% 12%
IB clients* 56% 50% 40%
JPMS Equity Research Coverage 42% 50% 8%
IB clients* 76% 66% 55%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com.
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67
17 September 2013
Ken Goldman
(1-212) 622-0359
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