Friday, March 29, 2013

Grocery Stocks On The Move Carrefour Group CA, Sysco SYY, Sobeys

Food stocks Sysco syy, Carrefour Group and Empire Company Limited provide opportunity for investors at a time when there's not much to be enthusiastic about. 

In Canada a weaker dollar is akin to an interest rate cut discouraging spending in that country.
In the mining industry, weaker gold and silver prices cut into profit margins last year, leading to weaker results (eight of the world's tens largest gold companies reported a drop in earnings last year).

Weak jobs numbers in the United States affects the world's biggest consumer market, making companies involved in the clothing industry riskier investments, and now bank stocks could be hit as a result of ongoing uncertainty in Cyprus.  Confiscating people's bank accounts will undoubtedly cause many in Europe to keep their money out of banks since many of Europe's largest financial institutions are based in Italy and Spain, two countries that could follow Cyprus's example if the Troika's new bailout rules are instituted elsewhere.  Will banks like Banco Santander allow money from client account to be taken in order to pay down national debts ?

 But Grocery Stocks Are Different!

People don't have a choice when it comes to eating.  Stockpiling food isn't something most will be considering either since people are increasingly health concious which makes them reliable on perishable foods (since the alternative is food that's loaded with unhealthy preservatives). 

Grocery stocks have grown nicely over the last year despite the inability of many to hike prices in step with price inflation (Tesco for example reported +1.8% increase in same-store sales for the three months ended January 5, 2013 despite lower market share and lower sales of frozen food).  Also in the UK: grocery industry market growth +3.7% lags general inflation +4.3%.
This month, Empire Company Limited (emp.a) reported a drop in gross profit margin (24% to 23%) and a 32% decline in cash equivalents as well as 6% decline in net earnings but the stock remained in positive terroritory despite that (+12% last three months). The food division, Sobeys profited 8% more but that was because the food division includes gas stations (236 Shell gas stations purchased last year). Sobeys is the second largest grocery retailer in Canada but third largest in Canada's biggest market, Ontario.

Carrefour Group (euronext:ca) is another example of a solid growth stock.  In 2012 the food retailer profited 3.3 times more than the previous year (€1.233 billion) despite a sales increase of just 0.5% and a decline in ebit of -1.6%.  It turns out the company's assets are more valuable that people think !  CEO Georges Plassat has been been busy steering the company in a more profitable direction.  He thought that operating in 30 countries was too demanding and so Carrefour started selling off assets, starting with Greece.  Competition in the countries Carrefour has been exiting is high and that makes its businesses attractive to potential buyers.  Colombian operations were sold for $2.5 billion which represents 20 times enterprise value/ebitda, investors liked the return and the stock moved higher.  In 2012 Carrefour pulled out of five countries.  The money from the asset sales helped the company pay down net debt (€6.9 billion to €4.3 billion).  The next country Carrefour is contemplating leaving is Turkey and you be sure the return it will get for assets there will be at a premium.
Carrefour also has an insurance division that has exposure to South America (35% of 1b net banking income is from Argentina and Brazil).  Carrefour stock price +10.85% last three months, +32.31% last six months.