Tasty Profits

Great profits and less economically sensitive - what's not to like?

Food-related industry groups stand out this week. Out of 15 industry groups with more positive earnings estimate revisions than negative, 4 are in the food sector.

Though 2 of these groups are very small, there is a good reason to view the revisions as a favorable sector trend. Food companies continue to exert pricing power. While consumers are opting to dine at home more often, they still eat. And the recession certainly has not stopped America's craving for snacks and coffee.

During the past 2 weeks, The Hershey Company (HSY - Analyst Report), J & J Snack Foods Corporation (JJSF - Snapshot Report) and Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report) all reported better-than-expected profits.

To be fair, not every food company is thriving. Both Kraft Foods Inc. (KFT - Analyst Report) and Sara Lee Corporation (SLE - Analyst Report) provided disappointing guidance this morning. But many food companies are doing quite well.

mmm...Chocolate

Hershey earned 59 cents from operations, a 9.3% increase from a year prior and 5 cents above the consensus estimate.

Net sales rose 2.6% in the fourth quarter to $1.38 billion. The Reese's and the Hershey's brands were the primary driver, delivering an 8% gain on retail takeaway. (Even struggling consumers are loathe to give up their chocolate.)

The company reiterated its 2009 forecast for sales growth of 2%-3%. The majority of the 10 covering brokerage analysts raised their profit projections in response. The revisions led to a 7-cent increase in the consensus earnings estimate to $1.96 per share.

HSY is a Zacks #2 Rank ("buy") stock and is classified in Food-Confectionary.

Snacks Are Still Selling

J & J Snack Foods reported per share earnings of 23 cents, which equates to a 128% increase in net income. Brokerage analysts had forecast profits of 16 cents per share.

Sales improved by 8% to $130.9 million. All the major business groups saw increases. (The company's products include SUPERPRETZEL, ICEE, Minute Maid frozen juice bars and Readi-Bake cookies.)

Both of the covering brokerage analysts raised their 2009 profit projections following the report. The revisions pushed the consensus earnings estimate 2 cents higher to $1.74 per share.

JJSF is a Zacks #1 Rank ("strong buy") stock and is classified in Food-Miscellaneous/Diversified.

Brewing A Bigger Customer Base

Green Mountain Coffee Roasters saw profits rise to 16 cents per share. Brokerage analysts had expected the company to earn 13 cents per share.

Higher demand for the company's K-Cup portion packs allowed revenues to surge 56% to $197 million. These packs are used in Keurig brewers - an all-encompassing coffee machine that makes a single cup of coffee. I haven't used it, but I have friends who love their Keurig brewers.

The downside of the Keurig brewers' popularity is narrower margins. Cost of sales increased by 710 basis points to 72.9% of revenues. The company's strategy is to sell the brewers near cost in exchange for what should be long-term revenues from the K-cup portion packs. (It's a similar model followed by other industries, particularly companies that make inkjet printers.)

Citing the growing demand for the K-Cup portion packs, GMCR raised both its fiscal sales and profit guidance. The company now expects fiscal 2009 sales growth of 43% to 48%. Adjusted EPS should total between $1.25 and $1.35, a 5-cent increase from the prior forecast. The majority of the covering brokerage analysts raised their projections in response, pushing the consensus earnings estimate up to $1.28 per share.

GMCR is a Zacks #1 Rank stock and is classified in Food Items-Wholesale.

Commodities Give ADM Pricing Power

Yesterday, Archer Daniels Midland Company (ADM - Analyst Report) added to the sector's bullishness.

ADM earned 91 cents last quarter, a 24.6% increase. The results were 22 cents better than analysts had forecast.

Net sales improved 1% to $16.7 billion. The company was able push through price increases thanks to higher commodity costs.

ADM saw growth in its Oilseed Processing and Agricultural Services segment. The Corn Processing segment, however, was hurt by a downturn in the ethanol industry. (Blame falling oil prices for hurting ethanol demand.)

Given the magnitude of the surprise, it seems likely that brokerage analysts will raise their fiscal 2009 earnings estimates over the next several days.

ADM is a Zacks #1 Rank ("strong buy") stock and is classified in Food-Flour & Grain.

Related ETFs

Many ETFs that encompass food companies also include other types of consumer staple stocks. The "closest" to a food sector ETF is the First Trust Consumer Staples AlphaDEX Fund (FXG).

The fund's heaviest weightings are in food and beverage companies. It does have exposure to other related industry groups, however, such as grocery stores.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

Read the full analyst report on GMCR

Read the full analyst report on HSY

Read the full analyst report on JJSF

Read the full analyst report on ADM

Read the full analyst report on FXG