US Food Producers Win Profits Abroad

THE United States food industry looks like a long-term winner - thanks in part to continuing marketing gains abroad. In terms of processing companies and packagers, the US is to food production and sales what the nations of the Organization of Petroleum Exporting Countries (OPEC) are to oil: the dominant global producer. And such large US companies as Kellogg, CPC International, Heinz, and Sara Lee tend to be profitable. Now, because of strong sales in the US, as well as overseas gains, industry earnings growth for 1991 should equal or exceed that of the last several years, despite recession.

Prudential Securities Inc., for example, is anticipating a 14 percent earnings gain for packaged-food companies this year, and 13 percent in 1992. Nor should the current uptick in inflation work against food companies, says Jane Shickich, an analyst with Prudential. She reckons that food prices will rise 3 to 4 percent this year, compared to 6 percent last year. Higher production and labor costs for producers, she says, will be quickly passed along to consumers; but that won't curb corporate earnings, s ince people have to eat. The only real threat to some producers could come from a sharp jump in the value of the dollar. That would work against producers highly dependent on overseas earnings.

Food companies have done so well lately, however, that some analysts fear growth momentum will be hard to sustain. Still, US food producers continue to post impressive international earnings.

Many companies are expanding overseas operations. Ralston Purina, Borden, Pioneer Hi-Bred International, Philip Morris, Archer-Daniels-Midland, and Tyson Foods are looking for growth in Europe, including Eastern Europe. Pioneer and Archer-Daniels-Midland are also planning sales campaigns in the Soviet Union and Asia. Campbell Soup is considering expanding its Canadian and Mexican operations. Even companies considered relatively weak in global sales, such as General Mills, are thinking international. Gen eral Mills has a new joint venture with Nestle, a Swiss company, to market products abroad.

Another plus for the food industry, experts note, is the easing of the takeover frenzy of the late 1980s. It had diverted the industry from focusing on sales and the introduction of new products. Now ConAgra, a major food company, for example, has expanded its canola oil and olive oil product lines through its Hunt-Wesson division.

Donaldson, Lufkin & Jenrette is expecting earnings growth of about 15 percent in 1991 for the food and beverage industry. The investment house notes in a recent report that favorable commodity costs will benefit producers. Moreover, the drop in interest rates since last year should "support the price/earnings multiples of stable growth companies."

Grocery chains, a partner of the food companies, have undergone structural reorganization in the last few years. National retailers, such as Safeway and A&P, closed older, less profitable stores. Or they developed newer, upscale outlets, including A&P's Food Emporium chain in the New York area. The retail industry has traditionally existed on minuscule profit margins of about 1 percent. But profits have risen recently because of lower inflation, which has allowed retailers to pass along higher operating costs without customer indignation.

A number of chains are expected to be remain attractive, not just because of strong market positions, but because food chains are excellent "defensive stocks" during periods of economic uncertainty. David Williamson, a food analyst for Advest Inc., an investment house based in Hartford, Conn., likes Giant Foods, in the Washington, D.C., area, Hannaford Brothers, in New England, and Albertson's, the sixth largest US retail food chain, in the Western US. He sees earnings gains of between 10 and 12 percent in 1991-92 for Giant. Albertson's, he predicts, will sustain a 17 to 18 percent earnings growth rate over the next five years. Hannaford, he believes, is attractive for long-term growth.