When it comes to defensive investing, food and beverages are two of the go-to sectors for getting equity market exposure but protecting your assets.  The logic is simple enough: “You gotta eat and you gotta drink!”  What about when you mix value screens with defensive stocks?

We have been searching for deep value stocks of late now that the market sell-off has taken out a large bite from the value of many major companies.  Some analysts group food differently than beverages, but our screen includes all of the following to identify the best value: Campbell Soup Co. (NYSE: CPB); The Coca-Cola Company (NYSE: KO); ConAgra Foods, Inc. (NYSE: CAG); Dr. Pepper Snapple Group, Inc. (NYSE: DPS); General Mills, Inc. (NYSE: GIS); Hormel Foods Corporation (NYSE: HRL); Kellogg Company (NYSE: K); Kraft Foods Inc. (NYSE: KFT); Pepsico, Inc. (NYSE: PEP); Tyson Foods, Inc. (NYSE: TSN); and Smithfield Foods Inc. (NYSE: SFD).

We are looking at food and beverages separately today in identifying the best value for investors looking for safe havens in the storm.  This sector is already very defensive in nature, and we found that the defensive sector of consumer products actually has a market premium due to investors seeking safety.  The good news is that the food and beverage sector has a few differences.

Campbell Soup Co. (NYSE: CPB) recently traded at $30.85 and its market cap is $10 billion.  The stock’s 52-week trading range is $29.69 to $36.99.  The current value is trading at a price-to-book ratio of about 9 to 1.  Its forward price earnings multiple is 12.2 and its return on equity is 78.8%.  The canned soup company currently pays a dividend yield of about 3.8% to investors.  Thomson Reuters has a consensus price target of $34.00, implying roughly 10.2% upside to the most recent price.  Campbell is under a new CEO and undergoing some change.  It is hard to imagine that this is a luxury good or a health food group stock, but the company has been under fire from private-label soups in the past and it is now going to add more salt and flavors to regain some market share.  Due to the correction, there is almost a turnaround element here.

The Coca-Cola Company (NYSE: KO) recently traded at $69.37 and its market cap is $159 billion.  The stock’s 52-week trading range is $56.01 to $71.77.  The current value is trading at a price-to-book ratio of about 4.5 to 1.  Its forward price earnings multiple is 16.1 and its return on equity is 41.29%.  The beverage giant currently pays a dividend yield of 2.71% to investors.  Thomson Reuters has a consensus price target of $77.86, implying roughly 12.2% upside to the most recent price. What is so interesting about Coca-Cola is that it just the magic 52-week high list right after Labor Day.  Coke and water, you gotta drink!  This is a huge position for Warren Buffett, but chances are that it will be that way in a decade from now (or for his successor).

ConAgra Foods, Inc. (NYSE: CAG) recently traded at $23.80 and its market cap is $10 billion against a 52-week trading range is $20.24 to $26.37.  The current value is trading at a price-to-book ratio of about 2.1 to 1.  Its forward price earnings multiple is 12.1 and its return on equity is 17.18%.  The food company currently pays a dividend yield of 3.9% to investors.  Thomson Reuters has a consensus price target of $27.89, implying roughly 17.2% upside to the most recent price. The company is half commercial and half consumer, making it different than SYSCO Foods.

Dr. Pepper Snapple Group, Inc. (NYSE: DPS) recently traded at $36.85 and its market cap is $8 billion.  The stock’s 52-week trading range is $32.89 to $43.13 and it trades at a price-to-book ratio of about 3.4 to 1.  Its forward price earnings multiple is 12.5 and its return on equity is 21.01%.  The beverage company currently pays a dividend yield of 3.47% to investors.  Thomson Reuters has a consensus price target of $42.83, implying roughly 16.2% upside to the most recent price.  “I’m a Pepper!” had been on the rise, but the pullback since July has been extreme considering its position.  The company has been trying to keep improving its debt levels, its credit metrics have been improving, and it has been raising its dividends.

General Mills, Inc. (NYSE: GIS) recently traded at $37.00 and its market cap is almost $24 billion with a 52-week trading range is $33.99 to $39.68.  The current value is trading at a price-to-book ratio of about 3.8 to 1.  Its forward price earnings multiple is 13.3 and its return on equity is 30.56%.  The consumer foods company currently pays a dividend yield of 3.25% to investors.  Thomson Reuters has a consensus price target of $41.06, implying roughly 9.4% upside to the most recent price.  This one has held up very well during the summer stock market tank.

Hormel Foods Corporation (NYSE: HRL) recently traded at $26.77 and its market cap is $7 billion.  The stock’s 52-week trading range is $21.58 to $30.50.  The current value is trading at a price-to-book ratio of about 2.7 to 1.  Its forward price earnings multiple is 15.1 and its return on equity is 19.24%.  The canned and prepared foods company currently pays a dividend yield of 1.9% to investors.  Thomson Reuters has a consensus price target of $27.36, implying roughly 2.2% upside to the most recent price.  The maker of Spam has one of the lower dividends and higher P/E ratios out there of its peers.

Kellogg Company (NYSE: K) recently traded at $52.50 and its market cap is almost $19 billion and its 52-week trading range is $47.03 to $56.84.  The current value is trading at a price-to-book ratio of about 7.8 to 1.  Its forward price earnings multiple is 14 and its return on equity is 50.9%.  The cereal and foods company currently pays a dividend yield of 3.2% to investors.  Thomson Reuters has a consensus price target of $59.44, implying roughly 12.0% upside to the most recent price.

Kraft Foods Inc. (NYSE: KFT) recently traded at $34.51 and its 52-week trading range is $29.01 to $36.30.  The DJIA component’s its market cap is almost $60 billion and it is trading at a price-to-book ratio of about 1.6 to 1.  Its forward price earnings multiple is 13.6 and its return on equity is 8.49%.  The consumer products company currently pays a dividend yield of 3.36% to investors.  Thomson Reuters has a consensus price target of $39.12, implying roughly 13.4% upside to the most recent price.  What makes Kraft so interesting is the partial break-up reorganization.  How much value this unlocks remains a question, but it certainly throws in at least some ‘adventure’ to what had been a very boring stock before it bought Cadbury.

Pepsico, Inc. (NYSE: PEP) recently traded at $60.00 and its market cap is $95 billion.  The stock’s 52-week trading range is $59.62 to $71.89.  The current value is trading at a price-to-book ratio of about 4 to 1.  Its forward price earnings multiple is 12.4 and its return on equity is 28.81%.  What makes Pepsi so interesting is that it is half beverages and half snack-foods.  This one currently pays a dividend yield of 3.43% to investors.  Thomson Reuters has a consensus price target of $75.75, implying roughly 26.3% upside to the most recent price. The company is still trying to make selective acquisitions internationally and you can see that the pullback from the highs is far from pretty.

Smithfield Foods Inc. (NYSE: SFD) recently traded at $19.45 and its market cap is $3.2 billion.  The stock’s 52-week trading range is $14.82 to $24.93.  The current value is trading at a price-to-book ratio of about 0.9 to 1.  Its forward price earnings multiple is 8.  Thomson Reuters recently had a consensus price target of $24.31, implying roughly 25% upside to the most recent price.  We would urge caution on that target price.  Smithfield is now down close to 25% from its 52-week high.  It has not performed well since its most recent report and many brokerage firms have lowered the price target objectives.   The screen data shows no dividend here, something that we might refer to as a ‘puzzlement.’

Tyson Foods, Inc. (NYSE: TSN) recently traded at $16.70 and its market cap is just over $6 billion; its 52-week trading range is $14.49 to $20.03.  The current value is trading at a price-to-book ratio of about 1.1 to 1.  Its forward price earnings multiple is 8.4 and its return on equity is 16.22%.  Tyson produces chicken, pork, and beef for meat distribution and for prepared foods.  It currently pays a dividend yield of almost 1%.  Thomson Reuters has a consensus price target of $21.63, implying close to 30% upside to the most recent price.  The valuations are low here and it is in the bottom of what appears to be a $15 to $20 price trading range.  Much of the company’s issues seem to be behind it and now many of the commodity price issues are behind it as well.

Technically food and beverages remain defensive stocks more than they are value stocks.  That being said, there are still some opportunities for value investors looking for opportunities in this sector.  It is no secret that Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) is an owner of food and defensive stocks like DJIA components Coca-Cola and Kraft.

The trick with value in this segment of food and beverages is finding the companies which might have some catalysts.  Dean Foods Co. (NYSE: DF) is in a perpetual turnaround right now and it could offer investors an incredible value opportunity even if it was too small in market capitalization to be considered for this food and beverage screen.

After reviewing the best value in beverage, Dr. Pepper Snapple loses out only by a hair to Pepsico, Inc. (NYSE: PEP).  Had this been a month or two ago that would have possibly been different.  The market sell-off seemed to reward Coca-Cola but Pepsico by our take has been treated too harshly.  It is not a dirt cheap stock by “value” standards.  Its recent NFL sponsorship renewal was also locked in for ten years and its better diversification and perceived upside to analyst targets seals the “Value Winner” as Pepsi in beverages.

Picking the best value in food products is no easy task when you have both Tyson and Smithfield trading at such low multiples.  Unfortunately, there is a reason for that and they also performed very poorly compared to peers during the financial market meltdown of 2008 to 2009.  Campbell Soup Co. (NYSE: CPB) is the value winner today, with the caveat that a turnaround and retooling of the company is underway.  It seems doubtful that the situation will get worse, but any time a new manager is running the show you just cannot rule anything out.  It also has to be acknowledged that the team has to achieve its results for this value to be unlocked.  Its high dividend of 3.8% is very attractive in the near-term.  Lastly, we would expect Campbell’s analysts to raise their price target objectives if the company is able to show progress and we would note that the current price target objective is well under its 52-week high.

Warren Buffett was quoted in the 1990s as saying, “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”  The ‘forever’ time line is hard to follow in the world of today.  Still, the goal is to fins companies where the risks appear to be largely factored in.

JON C. OGG

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