Food firms ‘face future of mediocre earnings’

ONE line in a new analysis of the outlook for food groups, if proved accurate, had condemned a number of them to mediocre earnings.

This analysis highlights the tensions between co-op farmer shareholders, wanting the best price for raw materials against the drive of the public arm of the business trying to achieve above average earnings.

Financial advertising to consumers insists that past performance is no guarantee of future performance.

But in the case of Irish companies, NCB Stockbrokers insists that the past is a definite guide to future company performance.

“It is reasonable to act on the basis that past performance will repeat itself provided the competitive advantages are sustained.”

Based on that, the brokers argue recent earnings per share performance “is the single biggest determinant of what value the share will trade on relative to the average market multiple.

Companies who have had superior earnings are likely to repeat that process.

What distinguishes out-performers from the rest is competitive advantage. That is defined as built-in product strengths competitors do not have or will find too difficult to catch up with despite their best efforts. On a scale from 0 to 5, NCB has ranked Irish food companies with those above 2.5 expected to achieve share and profit growth above the market average, while those under the midpoint will most likely not enjoy the same share ratings.

It is instructive on the basis of what the brokers describe as this non-scientific approach to look at some of the companies assessed using this method of comparative advantage.

Glanbia is an interesting case in point. Much has been said about its fresh focus on functional foods and the likely €100m spend on an ongoing basis for several years to come.

On its “comparative advantage” assessment, Glanbia is rated at 2.4, fractionally below the midpoint, suggesting slightly below average share-price performance over five years, due to the fact that it has struggled to earn above-average returns that generally ensure above-average share price performance.

While the company has gained ground and redefined itself to some degree, NCB says the pressure from farmer suppliers and from retailers places its margins under pressure. Low-cost retailers such as Lidl and Aldi, now with 10% of the grocery market, are putting further downward pressure on margins.

On balance, it argues Glanbia will struggle over the next five years for a variety of reasons, including the fact that 65% of its earnings come out of Ireland where it is under most pressure.

Greencore is looking to average growth due to the highly competitive nature of its own label convenience food market, accounting for up to 70% of the group’s total sales. Sugar is under pressure due to the impending EU changes coming down the track also.

In NCB’s view, despite the huge strategic shift in buying Hazlewood in Britain Greencore will struggle as the bakery and chilled pizza business in Britain still require significant restructuring.

Fyffes is given a 2.6 rating, pushing it marginally ahead of the others.

It is not a flattering rating either compared to the more stand-out ones given to IAWS and Kerry.

Looking back at the three groups, each has struggled in its own way to define a more secure place for itself in the very competitive food sector of the global economy.

Fyffes flattered to deceive while Greencore struggled to redefine itself in the broader context of the food sector as well.

Glanbia has also been in the wars and like Greencore, is struggling with a heavy debt burden.

In reality, all three groups have had their ups and downs over the past several years. If they could be characterised by any single weakness it has been their inability to move up a gear in earnings terms.