Autumn, prospect of economic slowdown help cook up interest in food stocks

Fall. The very thought of autumn musters up images of crisp days and falling leaves, football games, pumpkins and apple pies, biscuits, warm oatmeal, big family dinners, Thanksgiving, hot chocolate. If you thought fall was just for Monday evening sports fans, sweaters, and mail-order catalog publishers, look again.

For the big food companies, this is an important time of year, as more Americans replenish their larders, eat more at home, and start planning for big holiday gatherings.

``With inflation going up and restaurants becoming more expensive, home-cooked meals are all the more important for many people,'' says Jane Shickich, an analyst with Prudential-Bache Securities in New York.

Moreover, food stocks are a major staple, which means that in a time of economic downturn, or - as is currently the case, economic uncertainty - the stocks, as well as consumer nondurables in general, are highly desired by investors, says David Kowitz, an analyst with Goldman, Sachs & Co.

``Food stocks always look very attractive to folks fearing a recession,'' agrees Gary Chin, an analyst with Oppenheimer & Co. That is not to say, Mr. Chin says, that a recession is in the offing. But during the late stages of an economic cycle, as may now be the situation, food companies looks particularly appealing to more-cautious investors.

Nomi Ghez and David Kowitz, both of Goldman, Sachs, have looked at one food producer in particular, the giant Kellogg Company. And they like what they see. The company, with a 42 percent market share, dominates the ready-to-eat cereal market.

But market penetration, for Kellogg, does not mean resting on one's cornflakes. The company is introducing three new cereals. It has also begun ``a major capital investment program,'' according to a recent report by Ms. Ghez and Mr. Kovitz.

The new investment ``should increase the company's capacity by one-third over the next five years and improve efficiencies 5 percent to 6 percent annually,'' the report says.

Although Kellogg is currently ``the most profitable'' company in the food industry, according to Goldman, Sachs, it is expected to post even more growth in the future. Ghez and Kowitz conclude that operating earnings growth ``should accelerate to 14 percent from the current 12 percent rate.''

``Kellogg has had at least two small price increases in the past year or so,'' says Ms. Shickich, ``and yet the company continues to maintain its strong market dominance.'' She notes that Pru-Bache continues to like Kellogg, along with Campbell Soup Company, Kraft Inc., and Gerber Products Company, in the consumer food sector.

Two major US consumer food companies, the Pillsbury Company and General Mills Inc., have recently generated some more mixed studies by market analysts. John McMillin, a food analyst with Pru-Bache, sees no need for rushing to buy General Mills. He does note, however, that the stock should do well in a long-term framework, and thus considers it attractive over the ``next 12 to 18 months.''

The company holds ``oligopoly positions in a number of attractive food categories,'' Mr. McMillin concluded in a recent study. Cereals, always popular with consumers, especially in a day and age when doing things quickly is important in the morning rush-hour period, provide 22 percent of overall company revenues. And a line of new oatmeal products has been introduced under the Total logo. General Mills's Betty Crocker baking products continue to do well, as do its Gorton's fish food products, Yoplait yogurt, and Red Lobster and Olive Garden restaurants chains.

For the moment, however, McMillin is less than enamored with Pillsbury. It remains strong in the prepared-for-home food category, such as vegetables and prepared doughs for baking.

But the big problem for Pillsbury, McMillin says, continues to be its Burger King chain of fast-food restaurants. Burger King's real sales tumbled 5 percent in the first quarter, despite a vigorous and costly promotion program. Moreover, Pillsbury management has indicated that it will attempt to turn the chain around, rather than seek to sell it off.

Of all the US food companies, however, perhaps the one that most equals Kellogg in terms of overall consumer recognition, as well as market dominance, is Kraft.

Mr. Chin of Oppenheimer finds Kraft to be very well positioned in the current economic setting. As Oppenheimer notes in a recent report on Kraft, ``Kraft has one of the strongest balance sheets in the industry with cash and securities comfortably exceeding debt.''

Much of that cash, Chin notes, came from Kraft's recent sale of Duracell for a whopping $1.8 billion. Oppenheimer sees earnings growing at a solid 15 percent to 16 percent rate during the next three years.

Not surprisingly, consumer stocks, including one major food related company (Kroger), have been actual or rumored takeover candidates recently, another indication of the caution dominating the market, amid continuing concern about inflation, or, with an overly slowing economy, concern about recession developing at some point down the road.

Other consumer stocks in the takeover picture recently have been Polaroid, J.C. Penney, Greyhound, and Computer Sciences. Last week, the Dow Jones industrial average fell 7.47 points, to close at 2,090.68.