2020 packaged foods preview - credit suisse
TRANSCRIPT
2020 Packaged Foods Preview Big Food Looks Fresher for the Year Ahead; Recommending a Selective Approach
Packaged Foods | Sector Review
We are shifting our view on the food sector to a more neutral stance for 2020 because two of
the main drivers of our negative thesis for the past three years have eased off: 1) Profit margins
and sales growth are now in positive territory after a relatively effective cycle of reinvestment
spending; and 2) big grocery chain customers like Kroger and Walmart are becoming less
aggressive on pricing and taking a more constructive stance toward their food vendors. This is a
much better situation than a couple of years ago when the retailers were demanding bigger
price discounts, threatening them with private label, and charging new fees for inventory
handling and late deliveries. As a result, we think investors can take a selective approach to
food names in 2020 without worrying too much about a thematic pullback across the group.
Mondelez and Kellogg well-positioned for margin expansion; Kraft Heinz, Smucker,
and B&G need to reset lower. Food companies have reacted to the dynamic operating
environment by investing in e-commerce and digital marketing, reshaping the mix of their
portfolios, and adjusting their supply chain footprints. From our perspective, Smucker, Kraft
Heinz, and B&G Foods still need another year of investment to return to a path of sustainable
organic growth. In contrast, Kellogg and Mondelez appear to have invested sufficiently and are
now growing at a strong enough pace to generate operating leverage in the year ahead.
Still cautious on General Mills, Conagra, and Campbell. All three of these companies are
in a better position than they were a couple of years ago, but we do not find their risk/reward
compelling. Conagra’s distribution trends are better than we expected, but we harbor doubts
about the quality of the portfolio. General Mills has stabilized its U.S. Retail business, but the
risk of a consumer backlash against grain-free pet food formulations keeps us on the sidelines.
Campbell is reinvesting in the soup category, but we question whether it will be sufficient to
generate sustainable topline growth for the portfolio.
Things look OK for now, but structural challenges remain in place. Consumer distrust of
big food brands, declining barriers to entry, and the loss of negotiating power to big retailer
customers make this a very tepid growth sector (maybe 1-2%) without much room for error. To
succeed, these companies will need to stabilize the weak categories in their portfolios (like
cereal, canned soup, and yogurt) and leverage new technologies to improve the ROI on their
spending. Unexpected pricing pressure from customers and category-specific competitive
intensity represents the biggest downside threat to our estimates.
Outperform. Mondelez, Tyson Foods, Kellogg (upgraded in a separate report), Nomad
Underperform. Kraft Heinz, Campbell, Smucker, B&G Foods
7 January 2020
Equity Research
Americas | United States
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS,
LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business
with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Research Analysts
Robert Moskow
212 538 3095
Matthew Parker
212 325 4320
Jacob Nivasch
212 325 5219
7 January 2020
2020 Packaged Foods Preview 2
Table of Contents
Background 3
A Less Treacherous Set-up for 2020 .............................................................................. 5
Structural Challenges Remain In Place .......................................................................... 13
2019 Review and 2020 Outlook 25
Valuation 33
Top Picks for 2020 37
Most Upside Potential .................................................................................................. 37
Most Downside Risk .................................................................................................... 37
Large-Cap Food Bull and Bear Cases 39
Campbell (Underperform Rating, $43 Target Price) ........................................................ 39
Conagra Brands (Neutral Rating, $32 Target Price) ....................................................... 41
General Mills (Neutral Rating, $56 Target Price) ............................................................ 46
Hershey (Neutral Rating, $155 Target Price) ................................................................. 48
Hormel (Neutral Rating, $38 Target Price)..................................................................... 53
Kellogg (Outperform Rating, $78 Target Price) .............................................................. 56
Kraft Heinz (Underperform, $27 Target Price) ............................................................... 61
McCormick (Neutral Rating, $160 Target Price) ............................................................. 67
Mondelez (Outperform Rating, $60 Target Price) ........................................................... 72
Bear Case ................................................................................................................... 73
Nomad Foods (Outperform Rating, $26 Target Price) .................................................... 73
J.M. Smucker (Underperform Rating, $95 Target Price) ................................................. 75
Tyson Foods (Outperform Rating, $98 Target Price) ...................................................... 78
Appendix 81
7 January 2020
2020 Packaged Foods Preview 3
Background
Figure 1: Our View of Structural and Cyclical Challenges for Our Packaged Food Group
Source: Credit Suisse estimates
The top 20 food and beverage companies have lost share very year since 2011, mostly to
contemporary start-up brands such as KIND, Chobani, SkinnyPop, and Beyond Burger.
Consumer preferences have shifted toward organic and “real food” options with simpler
ingredients. A large percentage of “Real Food” advocates are Millennials who intrinsically
distrust mainstream legacy brands with mysterious ingredients.
Figure 2: The Top 20 Packaged Food and Beverage Companies Have Lost almost 500 bps of Market Share over the Past Eight
Years, Largely at the Expense of Niche, Entrepreneurial Brands and Private Label
Source: Nielsen xAOC plus C. Data as of 11/2019. We maintain the same 20 companies since 2011 for the purpose of this analysis and combine Conagra and Pinnacle.
Whole Foods essentially introduced organic foods to consumers on a broader scale and
educated them about how it sources its food. The major grocery chains took organic to the next
level by expanding their organic offerings to a point where they now sell more organic foods
than Whole Foods does. The big food companies tried to adapt to this trend by reformulating
their legacy brands with fewer artificial ingredients, but they found it difficult to change
preconceived notions about what their brands stand for. Organic Kraft cheese, for example,
sounds like a contradiction in terms.
Structural Cyclical
- Millennials' growing distrust of legacy brands and
processed foods
- Brand investment deprivation due to heavy cost-
cutting
- Lower barriers to entry for start-ups and new
brands
- Loss of negotiating power to big retailer customers
- Declining scale advantage with the fragmentation
of media and new channels
- Private label growth and the expansion of hard
discounters (Aldi / Lidl)
- E-commerce creates infinite shelf for consumers to
discover new choices
- Higher trade allowances to major retailers to fund
retailer price investments
- Supply chain inflationary pressures from rising
freight costs and raw material prices
- Dilutive M&A activity and integration risk from non-
core categories
47.6%
43.8%43.3%
42.8%
40.0%
41.0%
42.0%
43.0%
44.0%
45.0%
46.0%
47.0%
48.0%
2011 2017 2018 2019
Top 20
18.1%
19.2%
19.6%19.8%
17.0%
17.5%
18.0%
18.5%
19.0%
19.5%
20.0%
2011 2017 2018 2019
Private Label
34.4%
37.0% 37.1%37.4%
32.5%33.0%33.5%34.0%34.5%35.0%35.5%36.0%36.5%37.0%37.5%38.0%
2011 2017 2018 2019
Middle Tier
7 January 2020
2020 Packaged Foods Preview 4
Figure 3: Organic Food Now Constitutes Roughly 6% of Total U.S. Food Sales and
Has Grown at a CAGR of Roughly 10% Since 2007
Source: Company data, Credit Suisse estimates
Rather than investing in high growth, high risk projects to defend their turf, the food companies
spent about two years (2015-2017) employing aggressive cost-cutting methods to try to create
shareholder value. Most of them felt pressured to follow the lead of private equity-led Kraft
Heinz, which boosted its margins by 800 bps practically overnight by slashing headcount,
instituting Zero Based Budgeting programs, and consolidating its supply chain footprint. If they
didn’t respond with aggressive margin expansions of their own (typically 300-400 bps), they ran
the risk of attracting unwanted attention from activist investors, like Trian and JANA, or 3G itself,
which intended to further consolidate the food industry. The activists looked at 3G’s early
success as proof that these big food companies were operating with excessive waste and
needed to tighten their belts.
These cutbacks could not have come at a more inopportune time. Big retailer customers like
Walmart, Kroger, and Target were taking the opposite approach in their investment strategies.
They abandoned their earnings guidance and margin targets and started making big
investments in price cuts for the consumer, data analytics to improve their category
management acumen, supply chain automation, e-commerce services to make shipping more
convenient, and their private label brands. They recognized they needed to do this to protect
their turf from Amazon’s expansion into the grocery industry and European hard discounters,
which were opening new stores in the U.S. Making these investments eventually boosted their
same-store sales growth and vastly increased their negotiating power over their CPG vendors.
They began to flex their negotiating power in very public and adversarial ways:
In 2017, Walmart announced its intention to push for price concessions of 15% in
category management meetings with its vendors to secure its reputation with consumers as
the low-cost provider. Kroger began to actively invest in price as well.
Walmart and Kroger pushed more responsibility for working capital management to their
vendors. They negotiated for longer terms on their payables, introduced new fees for
holding inventory, and threatened to fine vendors which failed to deliver products within
their new, more narrowed just-in-time delivery windows.
3.1%3.2%
3.4% 3.5%
3.8%4.1%
4.5%
4.8%
5.2%
5.5%5.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Organic Food Market Share Growth (%)
7 January 2020
2020 Packaged Foods Preview 5
Walmart and Campbell got into a very public dispute in 2017 regarding the canned soup
category when Campbell refused to agree to Walmart’s request for deeper price cuts to the
condensed soup product line. Walmart responded by reducing Campbell’s display activities
and expanding its private label offerings. Campbell eventually provided deeper price
concessions to Walmart a year later and rebased the margin structure of its soup products.
Kroger at its 2017 Investor Day signaled its intention to make private label expansion a
major element of its Restock Kroger plan to optimize its shelves and “right-size” categories.
In pasta, it said that private label is more popular with consumers than the brands. In
ketchup, it said that it wanted to put more variety on the shelf rather than give so much
space to multiple package sizes for one brand (probably Heinz).
“So disruption at shelf, what does this mean? Before I get into this, I want to emphasize, this
will be done in the categories where customers are telling us it matters. And in pasta, it matters.
If you own the stage, the store and you write the play, the planogram, you can determine who
the star is. And the customers have told us in this particular category, the star is our brands, the
star is private selection and we will make a statement with that. It's at eye level. When this
product is cut against branded products, it cuts better. It's right for customers, it's right for
Kroger and it's right for you.” Yael Cosset, Kroger Chief Digital Officer, 10/11/2017
A Less Treacherous Set-up for 2020
Reinvestment Has Stabilized Sales and Profit Trends
Starting in late 2017, big food companies began to recognize that they had cut back too far and
needed to initiate reinvestment plans to reverse the cost-cutting, restore their reputation as
category leaders, and regain negotiating power.
They also made expensive acquisitions of fast-growing entrepreneurial brands that had been
invading their categories. Or, in the case of Conagra and Campbell, they made transformational
acquisitions to create costs synergies and shift the weight of their portfolios into more attractive
categories. General Mills bought Blue Buffalo, Smucker bought Nutrish, Hershey bought
SkinnyPop, Conagra, bought Pinnacle Foods, and Campbell bought Snyder’s Lance.
Figure 4: We Believe That Food Companies’ Advertising Spending Grew 3% on Average in Their Fiscal 2019. However, it is Still
Down 10% From FY 14
Source: Company data, Credit Suisse estimates
2014 2015 2016 2017 2018 2019
Change
vs 2014
FY 19 vs.
FY 18
KHC 652 694 708 629 584 602 -10% 3%
HRL 114 145 204 136 152 131 32% -14%
K 1,094 898 736 731 752 752 -31% 0%
MDLZ 1,552 1,542 1,396 1,248 1,173 1,248 -24% 6%
CPB 411 385 397 327 327 347 -20% 6%
GIS 870 823 754 621 576 602 -34% 4%
CAG 396 330 347 328 279 253 -30% -9%
HSY 570 562 521 541 479 513 -16% 7%
SJM NA NA 170 170 194 238 39% 22%
Average -10% 3%
7 January 2020
2020 Packaged Foods Preview 6
Figure 5: Reinvestment and Portfolio Changes Have Returned Big Food Companies’ Sales Growth to Modestly Positive Territory
on Average
Source: Company data for CAG, CPB, GIS, HSY, K, KHC, MKC, MDLZ, SJM, Credit Suisse estimates
The bull case on the space is that these companies’ investments are driving sequential
improvement in organic sales growth, which makes the promise of margin expansion through
operating leverage more credible. On average, these investments and portfolio changes helped
organic growth rates improve to 1% by the end of the 2019 from close to -1%. In industries
like this one with significant operating and financial leverage, there is an enormous difference
between the value of long-term, discounted cash flows for companies with +1% growth than
those with -1%, especially in an environment with low discount rates.
For example:
Campbell reset its soup margins 400 bps lower at the start of FY 18 after getting into a
very public dispute with Walmart. Margins began to tip positive in its fiscal 3Q19 due to
significantly lower corporate costs.
Kellogg’s margins dipped lower again in 2019, but they showed signs of sequential
improvement in 3Q, and management claims they will stabilize in 4Q when the company
expects to come to the end of a 12-month cycle of investment.
Conagra’s fiscal 2Q20 indicated that its Pinnacle acquisition is back on track and that the
company is making progress toward achieving its rather aggressive 3-year FY 22 plan for
margin expansion and double-digit EPS growth.
General Mills’ operating margin is down 100 bps from its fiscal 2017 largely because it
needed to reverse a portfolio strategy that cut too much marketing support for soup, baking
products, and refrigerated dough and led to sharp sales declines.
(3.0%)
(2.0%)
(1.0%)
-
1.0%
2.0%
3.0%
Sales Price
7 January 2020
2020 Packaged Foods Preview 7
Kraft Heinz’s EBIT margin is down more than 700 bps from its peak after the company
recognized that it had cut back too far on marketing and internal capabilities to keep pace
with retailers’ demands and changing consumer trends.
Figure 6: EBIT Margins for Big Food Companies Are Down 130 bps on Average from
2016. In Our View, Campbell and Kellogg Have Invested Sufficiently In Their Margins
to Adjust to the Changing Needs of Consumers and Retailers
Source: Company data, Credit Suisse estimates, Based on Calendarized Estimates.
CAL EBIT 2016 2017 2018 2019E 2020E
Chg vs.
2016
CAG 15.3% 15.9% 15.3% 15.6% 16.6% 1.3%
CPB 18.2% 17.8% 16.2% 15.8% 15.8% -2.4%
GIS 17.3% 17.0% 16.5% 17.5% 17.2% -0.1%
HSY 20.4% 20.7% 20.6% 21.3% 21.8% 1.4%
K 15.4% 14.7% 13.9% 13.1% 12.9% -2.5%
MDLZ 15.3% 16.3% 16.7% 16.5% 16.8% 1.5%
KHC 27.3% 27.8% 23.2% 20.2% 19.5% -7.8%
SJM 19.9% 19.2% 19.5% 18.6% 18.3% -1.5%
Average 18.6% 18.7% 17.7% 17.3% 17.4% -1.3%
CAL GM 2016 2017 2018 2019E 2020E
Chg vs.
2016
CAG 29.1% 30.0% 29.3% 28.2% 28.1% -1.0%
CPB 37.6% 36.3% 33.9% 33.6% 33.5% -4.1%
GIS 35.9% 34.9% 34.1% 35.0% 34.7% -1.2%
HSY 45.6% 45.6% 44.0% 45.0% 45.5% -0.2%
K 39.2% 38.0% 35.6% 33.9% 34.0% -5.2%
MDLZ 39.7% 39.8% 40.1% 39.9% 40.4% 0.7%
KHC 38.8% 38.2% 34.8% 32.5% 32.3% -6.5%
SJM 38.8% 38.0% 37.9% 38.1% 37.9% -1.0%
Average 38.1% 37.6% 36.2% 35.8% 35.8% -2.3%
7 January 2020
2020 Packaged Foods Preview 8
Figure 7: Food Industry Gross Margin Appeared to Stabilize in
3Q19
Figure 8: Food Industry EBIT Margin Trends Turned Positive in
3Q19 But We Expect it To Decline in 4Q19 Due to Ongoing
Investment Needs
Source: Company data, Credit Suisse estimates. Includes CAG, CPB, GIS, HSY,
K, KHC, MDLZ, SJM. Excludes McCormick due to accounting changes
Source: Company data, Credit Suisse estimates. Includes CAG, CPB, GIS, HSY,
K, KHC, MDLZ, MKC, SJM
More Constructive Relationships with Big Customers
From what we can tell, the investment spending by the big food companies has helped stabilize
their relationships with the big retailers. In stark contrast to the highly public disputes and
pronouncements by retailers in 2017 and 2018, the tone in 2019 has turned much more
constructive. Perhaps Walmart and Kroger feel more comfortable with the ground they have
staked out versus Amazon and the European hard discounters. Or perhaps they have become
more satisfied with the services and investments that the big food vendors are providing. If so,
the thaw in the retailer-vendor relationships will create a more positive operating environment for
everyone.
Kroger
Our most meaningful takeaway from Kroger's analyst day in November 2019 was that Kroger
has come to the end of its long period of margin reinvestment. The last few years was about
evolving the business and investing heavily in price to meet the threat posed by new e-
commerce entrants like Amazon and hard discounters like Aldi and Lidl. This year, there was
little discussion about investing in gross margin and much more discussion about leveraging
assets. This is a change. With same store sales ("IDs") momentum now improving, Kroger
sounds comfortable shifting to a model of profitable growth. If gross margin investment were to
continue, we believe it would have pressured CPG players.
We also noticed a more constructive tone from Kroger regarding its relationships with big CPG
vendors. Management described big brands as fundamental to its strategy and pointed out that
18-20 of its top 25 CPG partners are growing with Kroger (with the top 5 growing very well).
This is a much more constructive tone than what we heard two years ago when Kroger
threatened the big vendors with private label and penalized them for missing on-time delivery
windows.
2.6%
1.2% 1.2%1.0%
0.0%
-0.3%
-0.7%
-1.0%-1.1%-0.9%
-1.9%-1.9%
-0.9%-0.7%
0.0%
0.2%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2.6%
1.4%
2.1%
1.1%
0.3% 0.4%
0.0%
-0.1%0.0%
-0.1%
-1.4%
-1.0%
-0.5%-0.7%
0.3%
-0.1%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
7 January 2020
2020 Packaged Foods Preview 9
Walmart
Walmart has not verbalized a shift in its margin investment strategy as openly as Kroger, but we
have noticed a few changes around the edges:
1) Walmart’s rhetoric on pricing sounds less aggressive. Walmart opened the window for
CPG vendors to raise prices in January 2019 in response to higher freight and packaging costs.
In September 2019, at an investor meeting, management described itself as “pretty far along”
in its multi-year process of rolling out more aggressive prices in the food category to increase its
competitiveness regionally with only “a little more work to be done.” We think this means
Walmart will remain highly aggressive in food, but it doesn’t have plans to make significant price
investments on top off what it has already introduced. Management said it intends to keep
“constant downward pressure on food pricing,” but it described general merchandise as “the
next phase” in its efforts to drive price advantages.
2) Walmart is relying on big vendors to grow its snacks category. Walmart management
stated on its most recent earnings call that the snacks category was one of the primary drivers
of top line growth in its Grocery division. Our retail tracking data indicates that Walmart has
been partnering with the large cap food companies to fuel the growth, especially with Frito Lay,
Kellogg, Mondelez, Campbell, and Conagra. We were surprised to see Kellogg up 7.0% YTD in
the Nielsen-measured mass channel through October, Campbell up 3.4%, and Conagra up
8.7% YTD.
Figure 9: Frito Lay, Kellogg, and Campbell Achieved the
Largest Snacks Sales Growth in Nielsen’s Mass Channel in the
Last 12-weeks Ending 11/07/19
Figure 10: Kellogg and Mondelez Achieved the Largest Snacks
Sales Growth in all of Nielsen’s Channels Excluding Mass in
the Last 12-weeks Ending 11/07/19
Source: Nielsen, Credit Suisse. Mass channel is calculated as xAOC-Food-Drug.
Snacks includes Cookies and Crackers, Salty Snacks, Snack & Variety Packs, and
Sweet Snacks
Source: Nielsen, Credit Suisse. All Channels ex Mass includes Food, Drug, and
Convenience. Snacks includes Cookies and Crackers, Salty Snacks, Snack &
Variety Packs, and Sweet Snacks
3) Inventory reductions appear less aggressive. After three years of reducing its inventory
days outstanding to maximize cash flow, Walmart’s inventory is now growing faster than its
sales. This trend reversal probably comes more from Walmart’s hard goods category than food
because Walmart pulled forward purchases of goods from China ahead of expected tariffs.
However, it also might signal that the retailer wants to reduce out-of-stocks by carrying more
inventory at its stores and distribution centers.
Mass
Channel
12-week ending
11/07/19
YTD-ending
11/07/19
12-Week $
($ millions) YTD $ ($ millions)
Frito Lay 4.6% 6.8% $1,280 $4,726
Mondelez 3.0% 4.5% $525 $1,889
Kellogg 4.5% 6.9% $309 $1,112
Campbell 5.7% 3.4% $256 $891
Conagra 2.1% 8.7% $120 $439
Hershey 3.2% -0.7% $38 $133
All Channels
ex Mass
12-week ending
11/07/19
YTD-ending
11/07/19
12-Week $
($ millions) YTD $ ($ millions)
Frito Lay 2.4% 4.4% $2,433 $8,995
Mondelez 3.9% 3.8% $858 $3,110
Campbell 2.0% 1.8% $553 $1,970
Kellogg 7.1% 7.0% $444 $1,607
Conagra 1.2% 3.1% $212 $786
Hershey 1.9% 2.1% $71 $257
7 January 2020
2020 Packaged Foods Preview 10
Figure 11: Walmart’s Inventory is Now Growing Faster Than its Sales
Source: Company data, Credit Suisse estimates
Conservative Guidance Reduces Risk of Earnings Misses
In response to more challenging industry conditions, most of the management teams in the food
space have instituted more conservative targets for growth. This is especially true for companies
like Conagra, Campbell, and Kellogg, which are in the early stages of their turnaround plans.
We are generally in-line with the year one targets these companies have instituted; however, we
are very dubious about Conagra and Campbell’s ability to accelerate their revenue growth and
operating leverage in years two and three.
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Sales growth minus inventory growth, past 12 months
7 January 2020
2020 Packaged Foods Preview 11
Figure 12: Food Companies are Guiding to Less Than 1% Organic Revenue and EBIT Growth in the Current Fiscal Year. Excluding
Outliers (MKC and KHC), They are Guiding to 1% Organic Revenue and 1.5% EBIT.
Source: Company data, Credit Suisse estimates as of 12/17/19
Moderating Input Cost Inflation
Inflation is expected to decelerate modestly in 2020 compared to 2019. We think there is
potential for management teams to revise their inflation estimates lower during the course of
2020 as they begin to benefit from more favorable contracts with freight providers. Trucking
capacity expanded in 2019 after two years of very tight conditions. That said, the benefits from
lower freight might be partially offset by higher inflation in the protein markets owing to disease
issues in the Chinese pig herd from African swine fever.
Organic Revenue
Organic Revenue
Mid-Point EBIT Growth
EBIT
Growth
Mid-Point EPS Growth
EPS
Growth Mid-
Point
Campbell -1% to +1% 0% 0% to 2% (ex 53rd week) 1% Approx 7-9% ex 53rd week 8.0%
Conagra +1.0% to +1.5% 1.25% UNK UNK 3% to 8% incl 53rd week 5.5%
General Mills* 1% to 2% 1.5% 2.0-4.0%* 3% 3-5% 4.0%
Hershey 2% 2% approx 4-6% 5% 6-7% 6.5%
Kellogg** 1% to 2% 1.5% 0% 0% Down 10-11% -10.5%
Kraft Heinz approx -1.5% -1.5% approx -13-14% -14% approx down 20% -20.0%
McCormick 3-4% 3.5% 8-9%* 8.5% 6.5% to 7.5% 7%
Mondelez 3.5% 3.5% UNK UNK 5 to 7% 6%
Smucker -2.0% -2.0% approx -2% ex divest -2% -2% to 0% -1%
Average 0.4% 0.2% -0.7%
Average ex KHC, MKC 0.0% 1.5% 1.6%
General Mills
1-2% sales growth includes Blue Buffalo growth and excludes net benefit from 53rd wk, divestitures, and FX
2-4% EBIT growth assumes benefit from 53rd wk will be reinvested
Kellogg
Operating profit guidance provided ex-currency and excluding Keebler divestiture. EPS guide includes Keebler dilution
Smucker
EPS guidance includes about $40M of tough comparisons to last year's gain on sale and baking divestiture
7 January 2020
2020 Packaged Foods Preview 12
Figure 13: Dry Van Rates Are Well Below Prior Year Levels
Source: Company data, Credit Suisse estimates, CS Transportation team
Figure 14: Packaged Foods Companies Have Guided to Only a Small Deceleration of
Inflation in 2020 to 3.7% from 4.2% in 2019
Source: Company data, Credit Suisse estimates
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jan-
15
Apr-
15
Jul-1
5
Oct-
15
Jan-
16
Apr-
16
Jul-1
6
Oct-
16
Jan-
17
Apr-
17
Jul-1
7
Oct-
17
Jan-
18
Apr-
18
Jul-1
8
Oct-
18
Jan-
19
Apr-
19
Jul-1
9
Oct-
19
Aug. / Sept. impact
from hurricanes
Spot price
reacceleration in Dec
Company FY14 FY15 FY16 FY17 FY18 FY19 FY20
CPB 4.0% >expected 1.5% 2.0% 2.7% 4.0% 3.0%
CAG 1-2% 3.0% -1.1% 1.1% 3.7% 2.7%-2.8% 2.7%-2.8%
GIS 4.0% 2.0% 2.0% 1-2% 4.0% 4.0% 4.0%
K 3-4% >expected Moderate NA Modest MSD <FY19
HSY* Inflation Neutral Neutral High >FY19
Average 3.1% 2.8% 1.2% 1.9% 3.7% 4.2% 3.7%
*Except for FY19, Hershey guidance includes food ingredients only, not packaging
7 January 2020
2020 Packaged Foods Preview 13
Figure 15: Food Inflation Is Poised to Moderate in 2020 compared to 2019 levels.
Source: FactSet, USDA, Company data, Credit Suisse estimates
Structural Challenges Remain In Place
Big Retailers Maintain Negotiating Power
The past few years marked a major tipping point in the relationships between big food
companies and their largest grocery customers that won’t reverse any time soon. Big grocers’
investments in e-commerce have given them more control over the point-of-sale than ever
before. Expansion of their private label programs has given them more leverage in price
negotiations and more visibility into their vendors’ cost structure. New tools to analyze the data
from their frequent shopper programs have given them more leverage to push back on vendors
if they make biased category management recommendations. One executive from a CPG
manufacturer told us that his company needed to increase investment in revenue management
tools to keep pace in the “data war” with its big customers.
Big food companies are investing more heavily in big data, e-commerce, and manufacturing
flexibility to keep pace with their customers’ needs, but these investments have pressured their
margins lower. Retailers appreciate these investments, but our sense is that they will continue
longer than investors realize, thus preventing margins from moving materially higher. For context,
packaged foods operating margins are still 100 bps higher than their long-term average while
the big retailers’ margins are still well below theirs.
Commodity 2019 Inflation Inflation 2020 Source
Beef -0.1% -3.6% CME
Cheese 48.0% -13.1% CME
Chicken*** -1.3% NA Urner Barry
Cocoa 4.5% -3.0% Factset
Coffee 27.5% 0.8% Factset
Corn 11.5% 0.2% Factset
Eggs -32.0% NA Factset
Flour 1.0% NA Factset
HFCS 1.0% NA Factset
Milk 11.1% 5.9% Factset
Pork 17.0% -2% Factset
Potatoes 13.9% NA USDA
Peanuts -10.5% NA USDA
Tree Nuts* 1.0% NA Factset
Tomatoes 21.0% NA USDA
Soybean Meal -2.1% 4.8% Factset
Sugar 11.5% 7.3% Factset
Vegetable Oil** 25.2% 3.5% Factset
Wheat 11.1% 1.3% Factset
*Almonds
**Soybean Oil
***We show boneless, skinless chicken breast
7 January 2020
2020 Packaged Foods Preview 14
Figure 16: Walmart’s Margins Moved Substantially Lower Over
the Past Five Years as It Prioritized Reinvestment; Packaged
Food Companies Began Reinvesting in 2018
Figure 17: Similar to Walmart, Kroger’s Margins Diverged with
Food Companies After 2015
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Distribution Losses
Just about all of the big food companies have lost distribution over the past four years.
Distribution losses accelerated in 2019 when Walmart and other retailers took more aggressive
steps to rationalize SKUs to improve in-store operational efficiency and optimize their sales.
They are now using more sophisticated analytical tools to make their own category management
decisions rather than relying on the vendors to tell them what to do.
For example, we heard from vendors in the frozen aisle that Walmart took these steps to
rationalize SKUs in the frozen aisle because it was worried about the risk of out-of-stocks in its
brick-and-mortar stores as they take on more responsibility for fulfilling e-commerce
transactions. Walmart is very worried about incidents where the consumer selects an item on
the website for Click-and-Collect then learns it is out of stock when arriving at the store. As a
result, Walmart is leaning toward dedicating more of its in-store inventory to high demand
“power SKUs” and less to tertiary items. We believe this is part of the reason why Walmart only
accepted 33% of Conagra’s new products for its Birds Eye brand and 40% of its legacy brands
in the frozen aisle in 2019.
On one hand, one could look at this as a positive for big food companies with power brands. All
else being equal, big food companies probably prefer the operational simplicity of manufacturing
and marketing fewer SKUs with longer production runs. Also, small challenger brands may find
it more difficult to gain distribution in an environment where retailers are putting more focus on
top sellers.
However, we find it much easier to believe in the long term growth prospects of companies that
are gaining distribution than the ones that are losing it. Big companies that have over-
proliferated into niche segments of the market will need to pull back their offerings and maybe
put limits on future proliferation. In addition, as brick-and-mortar locations take on added
responsibility for direct e-commerce fulfillment, Walmart could use its leverage to charge the
vendors higher fees for warehousing and shelf space. This would increase the cost of doing
business across vendors of all sizes.
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
20
02
20
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20
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E
PKG Avg (left) WMT US (right)
0.0%
1.0%
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6.0%
12.0%
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20.0%
2002
2003
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2012
2013
2014
2015
2016
2017
2018
2019
E
PKG Avg (left) KR (right)
7 January 2020
2020 Packaged Foods Preview 15
Figure 18: Big Food Companies Continued to Lose Distribution in 2019, While Private Label Distribution Increased
Source: Company data, Credit Suisse estimates. Nielsen xAOC+C through November 2019. Private label estimate based on data through March 2019.
Private Label Expansion Continues
Walmart. Walmart has vastly expanded it private label capabilities. This marked a major shift
from its traditional point of difference, which was to leverage its vast scale in procurement and
distribution to provide consumers with the lowest every day price of big name CPG brands. By
relying too heavily on that approach, it fell behind major retailers like Kroger, Wegmans, and
H.E. Butt that had turned private label into a competitive advantage that drives store traffic.
In its effort to catch up, Walmart opened a new product development center, hired hundreds of
people from the CPG industry to develop a more effective strategy, and introduced higher
quality products, often with organic or natural ingredients. Several food manufacturers felt at
impact from this shift.
Kraft Heinz: In 2017, Walmart decided that its stores were over-indexed to Kraft Heinz’s
brands and expanded its private label offerings in cheese, meats, and nuts. The trend has
not stopped.
Conagra and B&G Foods: Since 2018, Walmart has been expanding space for its private
label frozen vegetables products. In 2019, it introduced new versions of Great Value frozen
dinners as well.
Smucker. Smucker had to roll back prices on peanut butter in 2019 after it allowed its
price gaps with private label to expand too far. Private label quality in this category has
improved.
Campbell Soup. Walmart and Campbell have resolved their dispute in the soup aisle, but
Walmart continues to expand its private label offerings in broth and ready-to-serve. In broth,
for example, we noticed that Walmart has placed its Great Value brand at eye level in the
middle of the shelf and placed Campbell’s Swanson brand at the bottom. The Great Value
brand’s packaging graphics are much more contemporary and higher quality than the
Swanson product.
Albertsons. Albertsons introduced 55 new private label products to the frozen aisle in 2019.
The line-up includes plant-based frozen bowls, plant-based meatless proteins (including
burgers), a Signature Select line of premium ethnic frozen bowls with recipes created by a New
Company 2014 2015 2016 2017 2018
Latest 52
wks
Last 12
wks
CONAGRA INC (1.2) (2.0) (3.2) (5.4) (2.3) (6.6) (7.4)
GENERAL MILLS 5.6 1.0 (3.4) (4.5) 0.8 (0.1) (0.2)
KELLOGG COMPANY (1.0) (3.4) (4.1) (3.5) (3.6) (0.2) 0.1
CAMPBELL SOUP CO 6.9 4.1 (2.4) (1.5) (3.0) (3.5) (3.2)
MONDELEZ INTERNATIONAL INC 4.8 (0.9) 0.2 3.8 2.0 (1.3) (1.3)
THE KRAFT HEINZ COMPANY (1.7) 0.1 (2.5) (3.6) (4.3) (2.1) (3.4)
THE HERSHEY CO 6.2 3.4 3.5 5.7 (0.1) (0.4) (2.1)
MCCORMICK & COMPANY, INC. 0.3 0.8 (0.8) (2.3) (4.0) (0.8) (1.1)
J. M. SMUCKER COMPANY, THE 3.7 4.7 1.0 (2.4) (0.6) (1.3) (1.0)
B & G FOODS INC. (2.0) (2.5) (2.4) (5.8) (5.5) (4.8) (5.0)
HORMEL FOODS CORPORATION 3.4 (3.6) (0.0) 1.9 (1.4) (3.9) (0.8)
TYSON FOODS INC 2.1 (3.4) (0.3) 2.5 (1.0) (4.0) (3.0)
Average 2.3 (0.1) (1.2) (1.3) (1.9) (2.4) (2.4)
Private Label 3.7 6.2 2.3 7.4 6.4 5.2 2.7
TDP % Change vs YA
7 January 2020
2020 Packaged Foods Preview 16
York City-based chef Suji Park, a Signature Select line of coffee-house inspired breakfast
sandwiches, O organics frozen breakfast “solutions,” and cauliflower-based mashed potatoes
and cheese bakes. Perhaps this is a sign that big grocery chains will make a bigger effort going
forward to capitalize on the innovation entering this space and the rising level of consumer
interest.
Kroger. Kroger sounds less combative about its private label strategy, but it continues to grow
at a rapid rate (+7%). What we find notable about Kroger's strategy is the degree to which it is
operating as a CPG company, with R&D, innovation and advertising. "We are not replicating
products, we are identifying trends and launching our own." Kroger is operating an "own brands"
business as a multi-category CPG participant with a captive retailer. Private label is 27% of
Kroger’s sales, well above the industry average.
As a result of these trends, categories such as cheese, frozen vegetables, snack nuts, and
single-serve coffee have seen significant private label expansion over the past year. In contrast,
retailers have reduced activity for breakfast cereal and ground coffee.
We view Hershey, Kellogg, and Mondelez as the most insulated from private label.
We view Conagra, B&G, and Kraft Heinz as the most exposed.
Private label activity in spice and seasonings and condensed soup has declined since the
prior year, which is a positive for McCormick and Campbell.
Figure 19: Private Label Has Made Substantial Share Gains in Cheese, Single-Serve Coffee, Ready-to-Serve Soup, Snack Nuts,
and Frozen Vegetables over the Past Year (52 Weeks Ending November 30, 2019) Across Nielsen-Measured Channels. In
Contrast, Retailers Have Reduced PL Activity in Breakfast Cereal, Refrigerated Dough, Condensed Soup, and Ground Coffee
Source: Company data, Credit Suisse. Nielsen xAOC+C since 11/30/19
2.1
1.5 1.4 1.4 1.41.3
1.1 1.00.8
0.6 0.60.5 0.4
0.3 0.2 0.20.1
0.0-0.1 -0.2 -0.2 -0.3 -0.3 -0.3 -0.4 -0.4
-0.7 -0.8-0.9
-1.9
-2.5
-2.0
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-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
7 January 2020
2020 Packaged Foods Preview 17
E-Commerce Poses Challenges and Opportunities
Big food companies claim that e-commerce and digital marketing represent a big opportunity for
them to leverage their scale and improve the ROI on their marketing spending. In theory, the big
companies ought to be able to outspend the small ones on data analytics and use the consumer
insights to increase their importance to their retailer customers. In addition, their digital
marketing tools give them the ability to customize their marketing messages based on
consumers’ past purchase history. Conagra, for example, estimates that shifting to more
“personalized communication” has led to a 50% reduction in wasted media impressions and
product development. This includes using data scraping rather than lengthy consumer testing to
develop new recipes. Similar to other CPG companies, it is now customizing the marketing of its
Healthy Choice meals products based on dietary preferences.
But from what we can tell, the consumers capture most of the value while retailers and
manufacturers absorb the cost to execute it. Consumers who shop in an omni-channel
environment expect the retailers to provide a seamless shopping experience without charging
too much of a premium for the convenience. Walmart, Kroger, and Target have made
considerable investments in e-commerce and supply chain flexibility to keep their consumers
happy. Walmart’s e-commerce business is growing at a 40% rate, and Click-and-Collect is now
in 2,100 stores with plans to be in 3,000-4,000 stores. Kroger’s digital revenue is growing at a
30% pace versus year-ago levels, with more than 2,000 stores offering grocery pickup and
over 2,300 offering home delivery.
By making these investments, the retailers have taken greater control over the point of sale
interaction with shoppers and they have found creative ways to charge fees to their vendors for
the privilege of participating in them. For example, Kroger will charge a premium to
manufacturers who wish to have their brands show up first during a category search online or
when consumers are creating an online shopping list.
Manufacturers don’t have to make as big of investment as their retailers, but they need to treat
e-commerce as incremental channel that requires incremental investment rather than a
substitute for traditional brick-and-mortar. This includes higher spending on shopper insights,
“slotting” allowances for preferable placement on the retailers’ e-commerce sites, and
investments in packaging and distribution flexibility.
Despite the higher spending, we have noticed that many of the small companies are actually
more skilled than the big ones at marketing and selling their brands in the e-commerce world.
Culturally, it is more difficult for a big company with 50+ years of investment in traditional brick-
and-mortar to shift its priorities. Small companies, on the other hand, can build their
organizations around e-commerce from their very start because it offers an “infinite shelf” and
the lowest barriers to entry. Having a younger workforce that grew up in a digital environment
tends to be a positive as well.
Pros and Cons of Precision Marketing
Kroger management has articulated a strategy and laid out specific financial targets for
monetizing its investments in e-commerce and consumer advertising into “alternative revenue”
streams. A big component of this strategy is “Precision Marketing," which is a developing
media/point-of-sale marketing opportunity available to suppliers. We would expect this channel
to continue to grow as CPG suppliers re-allocate marketing dollars from other media channels.
According to Kroger, the retailer has engaged 1,000 CPG brands so far with 90% retention.
Kroger estimates this market to be $13b.
Some food company management teams find programs like these attractive because it
theoretically provides a higher ROI than advertising directly to consumers through traditional
mediums. One of the unique elements of the program is that it can “close the loop” with the
consumer after it detects conversion to a sale. While we do not have hard data to refute this
assertion, we think it is fair to say that the manufacturer loses a high degree of control over the
7 January 2020
2020 Packaged Foods Preview 18
dollars it spends and the advertising message it can convey when it goes through an
intermediary. Brands tend to lose connectivity with their consumers when they stop
communicating with them directly.
Our concern is that Precision Marketing might give Kroger implicit negotiating power with
manufacturers when making category management decisions. If a manufacturer decides not to
participate, Kroger might decide to allocate less shelf space to its brands. Kroger insists that
there is no quid pro quo in this program, but this might change. By making its quantitative
alternative profit target so publicly visible for investors and internal constituents ($125-$150M
for FY 20), it is sending a pointed message to its organization to pursue it in an aggressive
manner.
TV Advertising No Longer a Barrier to Entry
The large competitive advantages that the big food companies built up over the years by
advertising on television and dominating the shelves of brick-and-mortar stores have declined.
Social media and digital advertising give the start-up brands a way to reach “social influencers”
without having to spend $20 million on a national advertising campaign. The Annie’s and KIND
brands, for example, reached $200 and $500 million in sales respectively without spending
money on national TV.
“Our marketing is good, often excellent. We won 17 awards, we're top-rated in both the Effie's
and the Work Report, and it confirms the effectiveness of our advertising. But marketing is
changing quickly. The marketing abilities of yesterday are no longer fit for today, far less
tomorrow, and we must ensure that the propositions of our brands are rooted in new deep
consumer insights and have purpose embedded in them.” Unilever CEO Alan Jope, November
13, 2019
In addition, large brick-and-mortar retailers usually waive their typical demands for “slotting
allowances” for smaller brands because they want to attract younger consumers to their stores
and because they recognize that they do not have big budgets. Ironically, the large retailers
become more demanding on the startups after the deep-pocketed big food companies acquire
them, thus further pressuring the big companies’ advantages of scale.
Supply Chain and Distribution Advantages Have Eroded
Big companies have increased their reliance on third-party manufacturers and brokers to reduce
their asset footprint and reduce their capital-at-risk. This fueled new investment into the co-
packing industry and led to excess capacity. As an example, the number of pages in the Private
Label Manufacturers Association’s trade show program guide has increased 35% since 2010.
Moreover, unlike the soft drink and beer industry in which small companies heavily rely on the
big companies’ distribution networks to get directly on customers’ shelves, the small food
companies easily gain access to retailers’ distribution centers through third-party truckers.
We believe Kraft Heinz is an example of a company that experienced a negative impact from
consolidating its supply chain too aggressively. After merging Kraft and Heinz in 2015, it
reduced the number of its North American manufacturing facilities to 44 from 55. This led to
distribution losses in 2017 for frozen potatoes and sliced lunchmeats when its remaining
facilities ran into start-up problems and weather-related shutdowns.
Supply chain consolidation has also made it difficult for Kraft Heinz to pivot to growth. In 2018,
it shifted its executive compensation metrics in the middle of the year to sales growth instead of
EBITDA and launched a plethora of new products to the market. These new products
introduced more complexity to the supply chain because they required smaller batch sizes and
greater use of co-packers. When its supply chain proven unable to meet the demands of
customers, it incurred significant upcharges for last-minute freight and co-packing. By the end
of the year, it had missed its supply productivity targets. For 2020, Kraft Heinz intends to pivot
to a new strategy of “fewer, bigger, better,” which we believe is designed to reduce pressure on
supply chain execution.
7 January 2020
2020 Packaged Foods Preview 19
Pricing Power Has Diminished
We can see the lingering effects of the big food companies’ loss of negotiating power when we
analyze their pricing trends. Earlier this year, most of the food companies claimed that they had
successfully raised pricing in North America to offset higher freight and packaging costs. Pricing
did move higher, but not to a material degree. Overall North American sales trends have been
tracking below 1% since mid-2018.
Figure 20: North American Sales Growth Averaged Only 0.5% in 3Q19 With Net
Pricing Up Only 0.7%
Source: Company data, Credit Suisse estimates
The management teams of the big food companies insist that their relationships with big
retailers have not changed. Price negotiations are difficult, they say, but no different from how
they were in the past. From our perspective, the environment is now actually much tougher.
As evidence of declining pricing power, the charts below show a widening difference between
the price increases that retailers charge consumers at their stores and the net price increases
that the big food companies report in their financial results. Retail pricing for these companies’
products has risen at an average annual pace of 2% on average over the past five years for U.S.
consumers. However, the food companies’ price realization over that time has been close to
zero. In fact, the difference between the price increases reflected at retail and the pricing
reported by the manufacturers keep expanding. We believe the expanding gap reflects the
retailers’ ability to capture a larger piece of the value chain. This includes pushing the vendors
for bigger promotional discounts and demanding higher fees for access to consumer data and
retailer marketing programs.
(3.5%)
(3.0%)
(2.5%)
(2.0%)
(1.5%)
(1.0%)
(0.5%)
-
0.5%
1.0%
1.5%
NA Reported Sales NA Reported Price
7 January 2020
2020 Packaged Foods Preview 20
Figure 21: Retailers Have Increased Pricing for Big Food
Companies’ Products by 2% on Average, but the Food
Companies’ Price Realization Has Been Close to Zero.
Figure 22: The Difference Between the Price Increases
Reflected at Retail and the Pricing Reported by the
Manufacturers Keeps Expanding
Source: Company data, Credit Suisse. Nielsen xAOC+C. Companies in the average
include K, MDLZ, KHC, SJM, GIS, CPB, HSY, and CAG
Source: Company data, Credit Suisse estimates. Nielsen xAOC+C. Companies in
the average include K, MDLZ, KHC, SJM, GIS, CPB, HSY, and CAG.
Portfolio Changes Have Increased Debt and Raised Risk Profiles
Many big companies recognized that they need to revamp their portfolios to improve their
growth rate. This entailed a) acquiring fast-growing, entrepreneurial brands that already have a
strong consumer following and theoretically benefit from leveraging a big company’s scale, b)
using acquisitions to shift the weight of the portfolio mix further away from declining categories,
and c) divesting declining brands that have become too antiquated to resuscitate.
General Mills, for example, bought Blue Buffalo in 2018 and stated its intention to divest
5% of its portfolio over time.
Smucker sold its Pillsbury baking business and bought the Nutrish brand.
Kellogg bought RXBAR, entered a JV in Nigeria, and sold its Keebler business.
Hershey bought SkinnyPop and, more recently, One Brands.
Campbell bought Snyder’s Lance and sold Bolthouse and Arnott’s.
Investors often wonder why these companies lack the entrepreneurial spirit internally to create
breakthrough new products and new pockets of demand on their own. In our experience, the
big companies that already operate at very high returns on capital have difficulty approving high
risk, high reward ideas that, by definition, dilute those returns. They would rather allocate capital
to lower-risk line extensions for their proven brands, even though they rarely generate category
growth.
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2013 2014 2015 2016 2017 2018 2019E
Annual NA Pricing Annual Retail Pricing
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2013 2014 2015 2016 2017 2018 2019E
7 January 2020
2020 Packaged Foods Preview 21
Figure 23: We Estimate That About 34% of the U.S. Food Companies’ Portfolio Face
Structural Challenges in the U.S. Market
Source: Company data, Credit Suisse estimates. Nielsen xAOC+C through 2019
Figure 24: Packaged Foods Companies Have Paid Premium EV/EBITDA Multiples for
Acquisitions over the Past Year
Source: Company data, Credit Suisse
We have yet to see much evidence that these transactions have boosted organic growth rates.
Of more concern, the transactions have increased the risk profile of their businesses by
extending them into unfamiliar categories (particularly pet food), increased their debt loads, and
diluted their margins. In many cases, they have to operate these acquired businesses
independently so as not to crush their entrepreneurial spirit. This makes it difficult to maximize
synergies.
While we agree that these companies needed to take more aggressive measures to return to
growth, we are concerned that they are destroying capital. They are paying huge multiples for
Company Good Stable
Structurally
Challenged
KHC 28% 19% 53%
CPB 42% 13% 45%
CAG 18% 38% 44%
K 55% 3% 42%
SJM 26% 39% 35%
HRL 44% 26% 30%
GIS 16% 59% 25%
MKC 45% 34% 21%
HSY 40% 50% 10%
Average 35% 31% 34%
25.1
22.021.4
19.5 19.1
17.4
15.815.0
14.013.0
10.210.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
7 January 2020
2020 Packaged Foods Preview 22
businesses outside of their core competencies while they are selling businesses that would have
contributed large incremental returns if management had simply marketed them more effectively.
As a result of these transactions, these stocks have not held up as well as they historically have
during nervous periods in the market. Investors do not want to own companies with unstable
profit margins, integration risk, and high financial leverage in a rising risk environment. To make
matters more challenging, the boards of many of these companies have had to suspend share
repurchases or even freeze their dividends. The loss of flexibility in their capital structures makes
it difficult for the boards to protect their falling share prices. If sales turn negative again, there is
a risk that these companies will feel rushed to make more divestitures in coming years to pay
down debt and further dilute their earnings.
Figure 25: Several Food Companies Have Made Acquisitions and Divestitures That Intrinsically Diluted Their Operating Margins
Source: Company data, Credit Suisse estimates
Figure 26: B&G Foods, Smucker, Conagra, Kraft Heinz’s Financial Leverage Increased in FY 19 While General Mills, Kellogg, and
Campbell’s Leverage Decreased. Several of Our Companies Have Had to Suspend Share Repurchases or Even Freeze Their
Dividends Following Transformational M&A
Source: Company data, Credit Suisse estimates
Core
Sales
($M)
FY 18 Core
Margin Divested Proceeds
Divested
Sales
($M)
Divested
Margin
(Estimate) Acquired Consideration
Acquired
Sales
($M)
Acquired
Operating
Margin
(Estimate)
Net Accretion
/ (Dilution) to
Margin
Campbell Soup 7,900 17.0% Arnott's* $2.5-$3.0B EST 1,100 18% Snyder's-Lance $6.1B 2,200 9% -2.1%
Bolthouse* 900 0%
Conagra 7,938 15.3% Wesson $180M 160 20% Pinnacle Foods $10.9B 3,000 14.7% -0.2%
General Mills 15,750 16.6% Green Giant** 570 16% Blue Buffalo $8B 1,400 19% 0.2%
Hershey 7,500 21.0% Amplify*** $1.6B 250 30% 0.3%
7,500 21.0% Pirates*** $420M 95 15% -0.1%
Kellogg 12,850 14.5% Keebler Cookies TBD 900 14.5% RXBAR $600M 200 10% -0.1%
Kraft Heinz 26,000 22.0% Canada Cheese $1.23B 430 25% Primal Kitchen $200M 50 10% -0.1%
26,000 28.0% Complan India $630M 150 20%
26,000 28.0%
Smucker 7,357 19.5% Baking Business $375M 370 17% Ainsworth $1.9B 800 11% -0.8%
Debt/EBITDA FY 16 A FY 17A FY18A FY 19E/A FY 20E Share Repurchase Dividend
B&G Foods 5.3 6.0 5.2 6.2 6.3 Repurchased 1.4M shares Sept YTD. $25.3M
available of $50M program
Frozen
Campbell 1.8 1.8 5.9 5.0 3.5 Suspended Frozen
Conagra 3.2 1.8 2.5 5.7 4.9 Suspended Frozen
General Mills 2.3 2.5 4.6 3.9 3.6 Suspended Frozen
Hershey 1.5 1.4 2.0 1.9 1.8 Repurchased 3.5M shares YTD ($490M) 3Q19 Raise
Kellogg 3.0 3.5 3.6 3.3 3.3 Repurchased 4M shares YTD ($220M) 3Q 19 Raise
Kraft Heinz 3.6 3.8 4.3 4.6 4.8 Immaterial 4Q 18 Cut
McCormick 1.7 5.1 4.1 3.3 2.8 Suspended 1Q 19 Raise
Mondelez 3.4 3.4 3.4 3.4 3.4 Repurchased 24M shares ($1.2B) in 2019. $3.5B
remaining in program
3Q19 Raise
Smucker 3.2 3.1 2.8 3.4 3.1 Reduced pace Oct 18 Raise
TreeHouse Foods 4.2 4.2 4.2 4.2 4.2 Immaterial none
Average 3.0 3.3 3.9 4.1 3.8
7 January 2020
2020 Packaged Foods Preview 23
Of course, the flipside to financial leverage is that equity investors can make outsized returns if
free cash flow proves sufficient to pay down the debt at a good pace. From a historical
perspective, we note that Smucker, Campbell, and Conagra generated the strongest degree of
free cash flow to pay down debt after covering their dividends. In contrast, Kraft Heinz and B&G
Foods did not generate sufficient free cash flow to support their capital structures. Kraft Heinz
has cut its dividend and may need to cut it again. We continue to believe that B&G will need to
cut its dividend as well.
Figure 27: By Our Estimates, Smucker and McCormick Will Have the Most Free Cash
Flow Available to Pay Down Debt Over the Next Two Years After Paying Its Dividend.
Kraft Heinz and B&G Foods Dividend Payments Have Exceeded Their Free Cash Flow
Source: Company data, Credit Suisse estimates
Melting Glaciers, Not Ice Cubes
Because of these pressures, we view big food companies as “melting glaciers” that are slowly
shrinking in relevance. We use melting glaciers as our analogy rather than melting “ice cubes”
because these companies are still very big and visible at retail and because the erosion occurs
slowly, not quickly. With enough effort and enough resources, these big companies could arrest
their declines. However, we believe they have not made enough sacrifices yet to stabilize their
businesses.
Dividend as % of FCF 2014 2015 2016 2017 2018 2019 2020
Past 3-Year
Avg
Kraft-Heinz 85% 269% -417% 182% 84% 82% 238%
B&G Foods 91% 73% 44% -928% 76% -6899% 100% 251%
Kellogg 56% -68% 64% 65% 80% 139% 64% 86%
Hershey 89% 53% 63% 48% 42% 42% 55% 44%
General Mills 52% 56% 56% 70% 51% 46% 58% 54%
Mondelez 50% 46% 68% 76% 48% 48% 54% 54%
McCormick 52% 44% 43% 38% 42% 48% 47% 43%
Campbell 71% 49% 35% 44% 47% 57% 62% 49%
Conagra 44% 42% 70% 44% 47% 47% 40% 46%
Smucker 41% 52% 25% 39% 39% 48% 73% 42%
7 January 2020
2020 Packaged Foods Preview 24
Figure 28: Like Melting Glaciers, the Big Food Companies Have Seen Their Competitive Advantages Slowly Eroded by Changing
Consumer Preferences and Lower Barriers to Entry.
Source: Credit Suisse
Organic and
Whole Foods
Consumer
fragmentation
Media
fragmentat ion
7 January 2020
2020 Packaged Foods Preview 25
2019 Review and 2020 Outlook
Large-cap packaged food stocks grew 32% in 2019 (as of December 31st), outperforming
staples peers. However, they only grew 5% on average over a two year period,
underperforming the staples group average and the broader S&P 500.
Figure 29: Large-Cap Food Stocks Outperformed Staples Peers in 2019 but Have
Underperformed Broader Staples and the S&P 500 Since 2017
Source: FactSet, Credit Suisse estimates
Outperformance from Campbell, Hershey, Mondelez, and Conagra came from a recovery in
their valuation multiples rather than changes to forward earnings estimates. General Mills was
the only company with a material degree of positive earnings revisions. Conagra, Campbell, and
Kellogg’s earnings revised lower, but the stocks moved higher due to higher valuation multiples.
Kraft Heinz and B&G Foods’ stock prices fell largely in synch with their downward earnings
estimates.
Food Companies 12/31/2017 12/31/2018 10/2/2019 12/31/2019Since
12/31/17
Since
12/31/1890 day
Kraft Heinz $78 $43 $27 $32 -58.7% -25.3% 21.0%
Mondelez $43 $40 $54 $55 28.7% 37.6% 2.0%
General Mills $59 $39 $53 $54 -9.7% 37.5% 1.2%
Kellogg $68 $57 $62 $69 1.7% 21.3% 11.6%
Hershey $114 $107 $154 $147 29.5% 37.1% -4.3%
Conagra $38 $21 $28 $34 -9.1% 60.3% 20.9%
Campbell $48 $33 $46 $49 2.7% 49.8% 7.1%
Smucker $124 $93 $107 $104 -16.2% 11.4% -2.5%
B&G $35 $29 $19 $18 -49.0% -38.0% -3.4%
McCormick $102 $139 $165 $170 66.5% 21.9% 3.0%
Tyson $81 $53 $82 $91 12.3% 70.5% 10.5%
Food Average (ex B&G Foods) 4.8% 32.2% 7.1%
Beverages
Coke $46 $47 $53 $55 20.6% 16.9% 4.3%
Pepsi $120 $110 $134 $137 14.0% 23.7% 2.0%
Monster $63 $49 $55 $64 0.4% 29.1% 15.3%
Molson Coors $82 $56 $57 $54 -34.3% -4.0% -5.0%
Anheuser Busch $93 $58 $83 $73 -21.9% 26.0% -12.5%
Beverage Average -4.2% 18.3% 0.8%
Household Products
Colgate $75 $60 $71 $69 -8.8% 15.7% -2.4%
Clorox $149 $154 $149 $154 3.2% -0.4% 2.8%
Estee Lauder $127 $130 $192 $207 62.3% 58.8% 7.6%
Kimberly Clark $121 $114 $140 $138 14.0% 20.7% -1.6%
Proctor & Gamble $92 $92 $121 $125 35.9% 35.9% 3.2%
Church & Dwight $50 $66 $75 $70 40.2% 7.0% -6.0%
Household Products Average 24.5% 22.9% 0.6%
Staples Average 8.3% 24.5% 2.8%
S&P 500 2,674$ 2,507$ 2,888$ 3,231$ 20.8% 28.9% 11.9%
7 January 2020
2020 Packaged Foods Preview 26
Figure 30: Calendarized EPS Declined -3% on Average in 2019, Including Significant Downward Revisions for Conagra, Campbell,
and Kellogg. General Mills EPS Estimates Revised Significantly Higher. Campbell Estimates Revised Lower due to the Divestiture
of Arnott’s
Source: FactSet, Company data, Credit Suisse estimates
Figure 31: P/E Valuation Multiples in the Food Space Rebounded in 2019 and Are Now Above Where They Were at the Start of
2018. We Believe CPB’s Valuation Will Re-Rate Lower. We Believe MDLZ’s Multiple Will Re-Rate Higher as Organic Growth
Accelerates.
Source: Factset, Company data, Credit Suisse estimates, P/E multiples as of the first day of each calendar year. Data as of 01/02/20
2012A 2013A 2014A 2015A 2016A 2017A 2018A
2019E at
1/02/19
2019E at
1/02/20 2020E
CAG 16% 4% 1% 8% 9% 24% 17% -5% -14% 15%
CPB 1 3% 2% 4% 9% 1% -7% -14% -2% -11% 5%
GIS 8% 1% -1% 13% -4% 3% 1% 1% 8% 1%
HSY 15% 15% 8% 3% 7% 8% 13% 5% 7% 7%
K 2 -3% 5% 1% -9% 4% 7% 8% 0% -9% 3%
KRFT / KHC NA 5% 4% NA NA 7% -1% 6% -20% -9%
MDLZ 7% 10% 15% 0% 21% 10% 13% 3% 3% 6%
MKC 9% 3% 8% 5% 9% 13% 15% 8% 8% 4%
BGS 36% -1% -13% 10% -9% 6%
SJM 3 12% 10% -1% -1% 15% -4% 3% 0% 0% 0%
Average ex-BGS 8% 6% 4% 4% 8% 7% 6% 2% -3% 3%
1. For comparability, CY12 and CY13 grow th rates adjusted to consider the sale of European business.
CY16 CY 15 adjust for the change in pension accounting methodology.
2. CY12 results exclude the accounting restatement for comparability.
3. CY16/17 excludes amortization expense
4. Tax reform benefit depicts 2018 EPS grow th benefit from a low er tax rate compared to 2017's tax rate
2012 2013 2014 2015 2016 2017 2018* 2019 2020
CAG 14.0 13.6 13.6 16.4 17.9 21.4 16.6 10.0 15.2
CPB 13.7 13.4 16.4 15.9 18.5 19.0 15.7 13.1 20.4
GIS 14.8 14.4 16.7 16.8 19.6 19.5 17.2 12.3 15.2
HSY 19.8 20.1 23.6 24.1 20.2 21.8 19.9 19.0 23.4
K 14.3 15.0 15.2 18.3 19.6 18.4 14.5 13.2 16.8
KHC NA 15.1 17.1 19.4 24.6 21.9 18.4 11.6 12.3
MDLZ 14.8 16.1 20.2 20.5 22.2 21.1 17.8 16.1 20.4
MKC 16.3 18.8 20.0 20.4 23.0 22.6 20.3 25.6 30.0
BGS 16.7 18.1 14.2 13.0 9.8
SJM 14.5 15.6 16.5 17.7 19.7 16.2 14.5 11.5 12.5
Average ex-BGS 15.3 15.8 17.7 18.8 20.6 20.2 17.2 14.7 18.5
1. Kellogg's P/E multiple rerates 1.0x lower beginning 2014 due to pension accounting change
2. Smucker's P/E multiple rerates 1.0x lower beginning 2017 due to accounting change for amortization expense
2018 P/E M ultiples lowered by 1.5x to adjust for Tax Reform benefits not yet expressed in consensus as of 1/1/18
7 January 2020
2020 Packaged Foods Preview 27
We expect organic sales growth to stay at 1% on average in calendar 2020, essentially in-line
with the 2019 performance. Forward consensus implies a fair degree of margin expansion in
2020 from operating leverage.
Figure 32: Forward Consensus Estimates as of 01/02/20, Calendarized
Source: FactSet Consensus Estimates, Company data, Credit Suisse estimates
2014A 2015A 2016A 2017A 2018A
2019E as of
1/02/19
2019E as of
1/02/20 2020E
CAG 1.55$ 1.92$ 2.25$ 2.14$ 1.93$ 2.21$
CPB 2.60$ 2.97$ 2.99$ 2.97$ 2.55$ 2.51$ 2.26$ 2.38$
GIS 2.70$ 3.06$ 3.02$ 3.10$ 3.14$ 3.16$ 3.40$ 3.42$
HSY 4.12$ 4.41$ 4.76$ 5.36$ 5.64$ 5.75$ 6.14$
K 3.74$ 4.00$ 4.31$ 4.31$ 3.93$ 4.03$
KRFT / KHC 3.33$ 3.55$ 3.51$ 3.72$ 2.81$ 2.56$
MDLZ 1.62$ 1.94$ 2.14$ 2.42$ 2.49$ 2.50$ 2.66$
MKC 3.82$ 4.32$ 4.97$ 5.39$ 5.35$ 5.58$
BGS 2.07$ 2.12$ 1.84$ 2.03$ 1.68$ 1.78$
SJM 7.88$ 8.14$ 8.16$ 8.15$ 8.14$
7 January 2020
2020 Packaged Foods Preview 28
Figure 33: Consensus Estimates Imply a Significant Rebound in Operating Profit Growth in 2020 to 4% (Excluding Impact of
Divestitures)
Source: FactSet estimates as of 12/23/19, Company data, Credit Suisse estimates
Figure 34: We Expect Organic Growth of 1% in 2020, Still Below Historical Averages
Source: Company data, Credit Suisse estimates, Includes CPB, CAG, GIS, HSY, K, KHC, MDLZ, MKC, SJM
Calendar 2018 HISTORY CONSENSUS EXPECTATIONS CAL 2019 CONSENSUS EXPECTATIONS CAL 2020
2017 2018
%
Change 2018 2019E
%
Change 2019E 2020E
%
Change
BGS 328 314 -4% BGS 289 304 5% BGS 289 297 3%
HSY 1,558 1,607 3% HSY 1,607 1,704 6% HSY 1,687 1,773 5%
K 1,879 1,880 0% K 1,822 1,763 -3% K 1,694 1,763 4%
KHC 7,770 7,024 -10% KHC 7,024 6,060 -14% KHC 6,174 5,629 -9%
MDLZ 4,119 4,322 5% MDLZ 4,322 4,260 -1% MDLZ 4,264 4,459 5%
MKC 720 715 -1% MKC 930 988 6% MKC 970 1,026 6%
CAG 1,203 1,202 0% CAG 1,202 1,184 -1% CAG 1,626 1,773 9%
CPB 1,302 1,095 -16% CPB 1,282 1,278 0% CPB 1,287 1,294 1%
GIS 2,613 2,601 0% GIS 2,601 2,602 0% GIS 2,899 2,980 3%
SJM 1,422 1,401 -1% SJM 1,432 1,422 -1% SJM 1,441 1,435 0%
Average ex KHC -2% Average ex KHC 1% Average ex KHC 4%
BGS Excluded Pirates Divestiture BGS: Excluded Pirates divestiture
CAG: Excluded Pinnacle acquisition CAG: CAG: Excluded Pinnacle CAG: Created a Pro Forma for Pinnacle in prior period
SJM: Excluded Ainsworth CPB: Removed International and created PF for Snyders 4Q18CPB: Removed International
CPB: Excluded Snyder's Lance SJM: Excluded divested baking business SJM: Pro Forma for Baking divestiture
GIS: Excluded Blue Buffalo acquisition K: Excluded divested Keebler business K: Pro Forma for Keebler divestiture
MKC: Excluded RB Foods acquisition GIS: Excluding Blue Buffalo acquisition GIS: PF Blue Buffalo acquisition
BGS and KHC are EBITDA estimates BGS and KHC are EBITDA estimates
3.7%3.3%
4.3%
6.0%
2.3%
1.5%
3.4%
1.4%
-0.4%
1.0%
-0.3%-0.6%
0.6%1.0%
1.2%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019E 2020E
7 January 2020
2020 Packaged Foods Preview 29
Figure 35: We Expect Only 1% Pricing On Average in 2020, Similar to 2019
Source: Company data, Credit Suisse estimates. Includes CPB, CAG, GIS, HSY, K, KHC, MDLZ, MKC, SJM
Figure 36: We Expect Gross Margins to Remain Flat in 2020, Well Below Peak Levels
in 2016
Source: Company data, Credit Suisse estimates, Includes CPB, CAG, GIS, HSY, K, KHC, MDLZ, MKC, SJM
(3.0%)
(2.0%)
(1.0%)
-
1.0%
2.0%
3.0%
Sales Price
37.7%37.7%
37.1%
36.9%
36.9%
36.2%
34.8%
36.9%
37.7%
36.7%
35.8%35.9%35.5%
37.1%
38.1%
37.6%
36.2%
35.8%35.8%
33.0%
34.0%
35.0%
36.0%
37.0%
38.0%
39.0%
17-year average 36.8%
7 January 2020
2020 Packaged Foods Preview 30
Figure 37: We Expect Operating Margins to Remain Flat in 2020, Well Below Peak
Levels in 2016
Source: Company data, Credit Suisse estimates. Includes CPB, CAG, GIS, HSY, K, KHC, MDLZ, MKC, SJM
Figure 38: EBIT Margins are Down 130 bps Since 2016; Gross Margins are Down 230 bps.
Source: Company data, Credit Suisse estimates
As a result of our assumptions, we are below consensus EPS for B&G Foods, Conagra, Kraft
Heinz, and Smucker for fiscal 2020. We are also below consensus for Campbell’s fiscal 2021.
For Kellogg, we are below consensus for 2020 due to technical factors related to the divestiture
of Keebler assets, but about consensus for 2021.
17.2%17.0%
16.6%16.1%16.0%
15.1%
13.9%
15.3%15.3%15.1%14.7%
15.0%
15.8%
17.0%
18.6%18.7%
17.7%17.3%
17.4%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
17-year average 15.9%
CAL EBIT 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E
Chg vs.
2016
CAG 10.2% 10.2% 10.4% 10.1% 10.0% 11.7% 15.3% 15.9% 15.3% 15.6% 16.6% 1.3%
CPB 16.6% 16.4% 15.6% 14.6% 15.2% 18.1% 18.2% 17.8% 16.2% 15.8% 15.8% -2.4%
GIS 17.4% 17.1% 16.8% 15.9% 15.5% 17.1% 17.3% 17.0% 16.5% 17.5% 17.2% -0.1%
HSY 17.7% 17.9% 18.5% 19.2% 19.6% 20.0% 20.4% 20.7% 20.6% 21.3% 21.8% 1.4%
K 16.1% 15.0% 14.1% 14.6% 14.8% 14.3% 15.4% 14.7% 13.9% 12.9% 12.8% -2.6%
MDLZ 12.1% 12.1% 12.9% 13.1% 15.3% 16.3% 16.7% 16.5% 16.8% 1.5%
KHC 14.6% 16.6% 18.9% 21.5% 27.3% 27.8% 23.2% 20.2% 19.5% -7.8%
SJM 16.4% 16.2% 16.9% 19.5% 19.9% 19.9% 19.2% 19.5% 18.6% 18.3% -1.5%
Average 15.3% 15.1% 14.7% 15.0% 15.8% 17.0% 18.6% 18.7% 17.7% 17.3% 17.4% -1.3%
CAL GM 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E
Chg vs.
2016
CAG 24.3% 25.0% 24.0% 24.0% 26.0% 28.0% 29.1% 30.0% 29.3% 28.2% 28.1% -1.0%
CPB 40.5% 39.5% 38.0% 36.3% 34.3% 37.0% 37.6% 36.3% 33.9% 33.6% 33.5% -4.1%
GIS 39.0% 37.9% 36.9% 35.6% 34.7% 35.6% 35.9% 34.9% 34.1% 35.0% 34.7% -1.2%
HSY 42.9% 42.4% 43.8% 46.0% 44.9% 46.0% 45.6% 45.6% 44.0% 45.0% 45.5% -0.2%
K 42.7% 41.3% 40.1% 39.0% 38.9% 39.1% 39.2% 38.0% 35.6% 33.7% 34.1% -5.1%
MDLZ 37.4% 37.3% 36.8% 39.4% 39.7% 39.8% 40.1% 39.9% 40.4% 0.7%
KHC 31.8% 32.5% 32.1% 34.7% 38.8% 38.2% 34.8% 32.5% 32.3% -6.5%
SJM 34.9% 34.0% 36.3% 36.6% 37.3% 38.8% 38.0% 37.9% 38.1% 37.9% -1.0%
Average 37.7% 36.7% 35.8% 35.9% 35.5% 37.1% 38.1% 37.6% 36.2% 35.8% 35.8% -2.3%
7 January 2020
2020 Packaged Foods Preview 31
Figure 39: We Are Below Consensus EPS Estimates For 50% of the Names in Our Sector in Fiscal 2020
Source: FactSet, Company data, Credit Suisse estimates, as of 01/03/20
Figure 40: We Are Below Consensus Revenue Estimates For 40% of the Names in Our Sector in Fiscal 2020
Source: FactSet, Company data, Credit Suisse estimates as of 01/03/20
CompanyCS Growth
Estimate
Consensus
Growth
Estimate
CS Growth
Estimate
2019 2020 2019 2020 2019 2020 2019 2019 2020
Campbell $2.30 $2.54 $2.62 $2.53 -12.0% 0.1% -19.7% -8.7% 10.1%
Conagra $2.02 $2.08 $2.01 $2.09 0.5% -0.6% -4.3% -4.7% 2.9%
General Mills $3.22 $3.38 $3.22 $3.36 -0.1% 0.8% 3.4% 3.5% 5.2%
Hershey $5.74 $6.17 $5.74 $6.16 -0.1% 0.3% 7.0% 7.2% 7.6%
Kellogg $3.91 $3.97 $3.89 $4.02 0.7% -1.3% -9.9% -10.0% 1.3%
Mondelez $2.47 $2.67 $2.46 $2.65 0.4% 0.9% 1.9% 1.4% 8.1%
Kraft Heinz $2.82 $2.45 $2.81 $2.59 0.3% -5.3% -19.1% -20.3% -13.0%
B&G Foods $1.64 $1.56 $1.69 $1.74 -2.8% -10.7% -10.4% -8.8% -5.1%
McCormick $5.34 $5.78 $5.35 $5.57 -0.2% 3.7% 7.5% 7.7% 8.2%
Smucker $8.29 $8.07 $8.29 $8.15 0.0% -0.9% 4.1% 4.1% -2.6%
-1.3% -1.3% -3.9% -2.9% 2.3%
CS Estimates Consensus Estimates
Credit Suisse
Difference vs
Consensus
Company SalesCS Growth
Estimate
Consensus
Growth
Estimate
CS Growth
Estimate
Consensus
Growth
Estimate
2019 2020 2019 2020 2019 2020 2019 2019 2020 2020
Campbell $8,107 $8,132 $8,107 $8,133 0.0% 0.0% -6.7% -6.7% 0.3% 0.3%
Conagra $9,538 $10,632 $9,538 $10,716 0.0% -0.8% 20.2% 20.2% 11.5% 12.3%
General Mills $16,865 $17,184 $16,865 $17,213 0.0% -0.2% 7.1% 7.1% 1.9% 2.1%
Hershey $7,986 $8,224 $7,980 $8,193 0.1% 0.4% 2.5% 2.4% 3.0% 2.7%
Kellogg $13,528 $13,546 $13,524 $13,271 0.0% 2.1% -0.1% -0.2% 0.1% -1.9%
Mondelez $25,758 $26,551 $25,782 $26,481 -0.1% 0.3% -0.7% -0.6% 3.1% 2.7%
Kraft Heinz $25,079 $24,550 $25,054 $24,770 0.1% -0.9% -4.5% -4.6% -2.1% -1.1%
B&G Foods $1,655 $1,654 $1,662 $1,677 -0.4% -1.4% -2.7% -2.3% 0.0% 0.9%
McCormick $5,390 $5,478 $5,378 $5,518 0.2% -0.7% 1.6% -0.6% 1.6% 2.6%
Smucker $7,838 $7,591 $7,838 $7,588 0.0% 0.0% 6.5% 6.5% -3.1% -3.2%
Average 0.0% -0.1% 2.3% 2.1% 1.6% 1.7%
Credit Suisse
Difference vs
Consensus
Consensus EstimatesCS Estimates
7 January 2020
2020 Packaged Foods Preview 32
Figure 41: We Are Below Consensus EBIT Estimates for 50% of the Names in Our Sector for Fiscal 2020
Source: FactSet, Company data, Credit Suisse estimate as of 01/03/20
Figure 42: Credit Suisse vs. Consensus for 4Q19
Source: FactSet, Company data, Credit Suisse estimates as of 1/03/20
Company EBITCS Growth
Estimate
Consensus
Growth
Estimate
CS Growth
Estimate
Consensus
Growth
Estimate
2019 2020 2019 2020 2019 2020 2019 2019 2020 2020
Campbell $1,266 $1,301 $1,266 $1,294 0.0% 0.6% -10.1% -10.1% 2.8% 2.2%
Conagra $1,470 $1,714 $1,470 $1,745 0.0% -1.8% 23.4% 23.4% 16.6% 18.8%
General Mills $2,858 $2,954 $2,858 $2,941 0.0% 0.4% 5.8% 5.8% 3.3% 2.9%
Hershey $1,699 $1,798 $1,704 $1,798 -0.3% 0.0% 5.7% 6.0% 5.8% 5.5%
Kellogg $1,751 $1,737 $1,761 $1,791 -0.5% -3.0% -6.8% -6.3% -0.8% 1.7%
Mondelez $4,260 $4,452 $4,260 $4,555 0.0% -2.3% -1.4% -1.4% 4.5% 6.9%
Kraft Heinz $5,072 $4,779 $5,031 $4,822 0.8% -0.9% -16.6% -17.6% -5.8% -4.2%
B&G Foods $240 $236 $236 $247 2.0% -4.5% -5.7% -8.4% -1.8% 4.8%
McCormick $990 $1,060 $988 $1,047 0.2% 1.2% 6.5% 4.9% 7.0% 5.9%
Smucker $1,492 $1,419 $1,481 $1,427 0.8% -0.6% 4.2% 3.5% -4.9% -3.6%
Average 0.3% -1.1% 0.5% 0.0% 2.7% 4.1%
Consensus Estimates
Credit Suisse
Difference vs
Consensus
CS Estimates
Company Sales CS Estimate Consensus
Credit Suisse
Difference vs
Consensus Company EBIT CS Estimate Consensus
Credit Suisse
Difference vs
Consensus
HSY $2,068 $2,060 0.4% HSY $381 $386 -1.3%
K $3,173 $3,171 0.1% K $391 $403 -3.0%
MDLZ $6,803 $6,840 -0.5% MDLZ $1,093 $1,093 0.0%
KHC $6,638 $6,609 0.4% KHC $1,302 $1,290 0.9%
BGS-US $465 $473 -1.7% BGS-US $52 $54 -4.2%
MKC $1,527 $1,517 0.7% MKC $315 $313 0.6%
THS $1,156 $1,159 -0.3% THS $102 $104 -1.9%
Company EBITDA CS Estimate Consensus
Credit Suisse
Difference vs
Consensus Company EPS CS Estimate Consensus
Credit Suisse
Difference vs
Consensus
HSY $460 $461 -0.2% HSY $1.23 $1.24 -0.7%
K $552 $531 4.0% K $0.89 $0.86 3.3%
MDLZ $1,240 $1,318 -5.9% MDLZ $0.61 $0.60 1.8%
KHC $1,562 $1,560 0.1% KHC $0.68 $0.68 0.2%
BGS-US $67 $71 -6.3% BGS-US $0.28 $0.32 -11.7%
MKC $351 $352 -0.4% MKC $1.60 $1.61 -0.4%
THS $137 $155 -11.5% THS $1.08 $1.11 -2.7%
7 January 2020
2020 Packaged Foods Preview 33
Valuation
Valuation multiples in the staples sector tend to correlate strongly with organic revenue growth
rates. Over the past year, companies with the weakest sales trends (Smucker and Kraft Heinz)
experiencing significant multiple contraction versus their peers. McCormick and Church &
Dwight are fetching high valuation multiples for their growth.
Figure 43: Our Analysis Shows a Strong Correlation Between Forward P/E Valuation Multiples and Organic Revenue Growth Rates
for 2019 in the Consumer Staples Sector (R Squared Relationship of 0.61)
Source: FactSet, Organic sales growth estimates for calendar 2019. P/E multiples based on forward 12-month estimates as of 12/23/19
U.S. food trades at a discount to consumer staples peers, but we think it is justified due to the
stark difference in organic growth rates. Household products companies are growing at a 4-5%
rate, Beverage at 3.5% while Food is growing at only 1%.
BGS
CPB
CHD
CLX KO
CL
CAG
BN-FR
GIS
HSY
K
KMB
KHC
MKC
MDLZ
NESN-CHPEP
PG
SJM
UL
R² = 0.6101
10.0
15.0
20.0
25.0
30.0
35.0
-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%
Forw
ard
P/E
Mu
ltip
le
Current FY Organic Growth Rate Estimate
7 January 2020
2020 Packaged Foods Preview 34
Figure 44: Packaged Food Companies are Growing at Only 1% Compared to
Household Products and Beverage Growth of 3.5%-4.5%
Source: Company data, Credit Suisse estimates, FactSet
Figure 45: Food Stocks Are Trading at a 31% Discount to Staples Peers Compared with a 17% Discount Average over the Past
Five Years
Source: FactSet, Credit Suisse estimates. Data as of 1/02/20
4.5%
5.2%
4.5%4.7%
3.8%
2.5%
3.5% 3.4%
1.1%0.9%
0.5%
1.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1Q19 2Q19 3Q19 4Q19E
Household Products Beverages Packaged Food
10
12
14
16
18
20
22
24
26
NTM
P/E
Mu
ltip
le
Beverages Pkg Food Household Products
7 January 2020
2020 Packaged Foods Preview 35
Figure 46: Food Stocks Are Trading at an 8% Premium to the S&P 500 Compared to a 4% Premium over the Past 20 Years.
Source: FactSet, Company data, Credit Suisse estimates, as of 1/06/20
However, when we use valuation metrics that put greater emphasis on financial leverage and
cash flow return on capital, we find many of the food stocks just as expensive if not more
expensive than their historical averages.
Figure 47: Big Food’s (ex MKC) EV/EBITDA Multiple Average of 13.3x is 5% Higher than its 5-year Average, as of 1/02/19
Source: FactSet, Company data, Credit Suisse estimates
Average P/E Multiples
CAG CPB GIS HSY K KHC MDLZ MKC SJM
Pkg
Food
ex MKC SPX
HPC -
Bev HPC PPC Bevg
Pkg Food
inc MKC
20 yr avg 14.9 16.4 16.5 20.7 16.7 17.0 20.0 19.3 16.0 17.0 16.4 19.3 19.8 13.0 18.7 17.5
10 yr avg 15.1 16.0 16.3 21.0 15.9 17.5 20.0 21.2 15.7 17.0 15.5 19.6 20.4 11.8 18.8 17.6
5 yr avg 16.8 17.2 17.3 21.3 16.8 19.1 20.2 24.2 16.0 18.1 17.1 22.0 23.0 10.4 21.1 18.8
Current 15.1 18.7 15.4 23.5 16.9 12.3 20.4 30.5 12.6 16.9 18.2 23.9 24.8 12.7 23.0 18.4
Food P/E Premium / (Discount) to Food Peers
CAG CPB GIS HSY K KHC MDLZ MKC SJM
Food /
SPX
Food /
HPC -
Bev
20 yr avg -12% -4% -3% 22% -2% NA NA 14% -6% 4% -12%
10 yr avg -11% -6% -4% 24% -7% 3% NA 24% -8% 10% -13%
5 yr avg -7% -5% -4% 18% -7% 6% 7% 34% -12% 6% -18%
Current -11% 11% -9% 39% 0% -27% 11% 66% -25% 8% -30%
Forward EV/EBITDA Multiples (based on consensus)
As of
1/1/19
As of
1/02/20
2011 2012 2013 2014 2015 2016 2017 2018 2019E 2019E
CAG 7.3 7.4 7.3 9.5 10.7 12.8 13.0 12.0 9.9 12.2
CPB 8.8 9.0 9.4 11.2 11.1 11.8 11.9 10.0 10.7 14.2
GIS 9.0 9.8 9.5 10.7 11.9 12.6 12.5 12.5 11.1 12.9
HSY 9.5 10.7 11.5 13.6 13.6 12.3 13.5 13.9 13.6 16.6
K 9.9 9.9 11.1 10.6 10.9 13.3 12.7 11.5 11.9 13.7
KHC 16.0 15.7 14.5 11.1 11.7
MDLZ 9.4 9.8 12.0 13.4 13.7 16.5 16.0 14.9 14.4 17.7
MKC 11.4 11.1 12.8 13.4 14.6 15.9 15.7 16.5 19.0 22.2
BGS 8.8 10.5 11.6 12.7 12.2 10.4 11.2 10.9 12.2 10.0
SJM 7.9 8.8 9.0 10.1 10.6 12.0 11.3 11.4 9.9 10.4
Average ex-MKC 8.8 9.5 10.2 11.5 11.8 13.1 13.1 12.4 11.6 13.3
7 January 2020
2020 Packaged Foods Preview 36
Figure 48: Short Interest in the Large Cap-Food Group Has Declined from a Peak of
7% of Shares Outstanding in Mid-2018 to 4.6% as of December 2019 but Remains
Above the Historical Average of 3.7%
Source: FactSet, Company data, Credit Suisse. Companies included in this calculation are KHC, MLDZ, GIS, K,
HSY, CAG, CPB, SJM
4.58
1.4
2.4
3.4
4.4
5.4
6.4
7.4
7 January 2020
2020 Packaged Foods Preview 37
Top Picks for 2020
Most Upside Potential
Mondelez (Outperform, $60 Target Price): After years of focus on cost controls that starved
the brands, the company has rejuvenated its revenue growth by decentralizing its decision
making and providing more resources to meet country-specific needs. Mondelez’ organic
growth rate has accelerated from 1.0% in 2017 to 3.5%+ in 2019 and is well on its way to 4-
5% in our view given the advantaged platform in developing markets (40% of sales) and its
strength in global snacks (Oreos, Cadbury, Milka, etc.). We believe the valuation multiple will re-
rate 2-3 turns higher as the higher growth rate puts the stock in the league of high quality,
multi-national peers like Pepsico, Nestle, and Unilever. We expect robust guidance for 2020 to
ease investors’ concerns about lack of operating leverage from its investments.
Tyson Foods (Outperform, $98 Target Price): Because of its leverage to higher protein
prices and global demand, Tyson is well-positioned to capitalize on African swine fever’s impact
on global meat supplies. With its pig herd down at least 40%, China will need to import more
meat from around the world to keep its domestic prices from getting out of control. The recent
thaw in U.S.-China trade relations represents another stepping stone to stronger U.S. meat
exports. As the export volume grows, we expect Tyson’s Pork and Chicken margins to return to
the high end of their normalized ranges. In this scenario, Tyson’s EPS can jump to over
$8.00/share, versus consensus’ FY21 EPS estimate of $7.43.
Kellogg (Outperform, $78 Target Price): We upgraded Kellogg to Outperform because we
believe that its portfolio changes and reinvestment spending over the past two years has set the
stage for sustainable revenue growth, margin expansion, and high single-digit EPS growth. We
expect the benefits of operating leverage to materialize in 2020 as the pace of reinvestment
slows, the temporary dilution from portfolio changes turns favorable, and the high-margin U.S.
cereal business stabilizes. Our view is that a good portion of the company problems in North
American cereal (19% of sales) are self-inflicted and that the business will improve considerably
in 2020 now that consumer trends in the cereal category have stabilized. With only 33% of sell-
side analysts recommending the stock, there is a lot of room for positive re-ratings and some
additional multiple expansion as well.
Nomad Foods (Outperform, $26 Target Price): We expect Nomad to generate significant
upside for shareholders similar to that of other U.S. M&A roll-ups. The core business is well on
track to maintain steady 2-3% organic growth because of its strong positioning in the attractive
plant-based frozen foods category. It is now in the process of rolling out a new Veggie Bowls
line under the Iglo brand into five European markets and launching Green Cuisine plant-based
protein substitutes in the UK. We have been positively surprised by management’s ability to
raise prices to offset commodity inflation in 2019 with minimal elasticity of demand. More
importantly, we expect the company to utilize the cash it raised from a recent equity offering to
make an accretive acquisition in the near-term. Prior acquisitions (Goodfella’s and Aunt
Bessie’s) both exceeded expectations. We see the EV/EBITDA valuation multiple (now at a
discount of 10% to its food peers) re-rating 1-2 turns higher once it consummates an
acquisition and as investors’ fears of a “hard Brexit” diminish.
Most Downside Risk
Campbell Soup (Underperform, $36 Target Price): We find it difficult to believe in
management’s three-year plan of generating 1-2% sales growth, 4-6% EBIT growth, and 7-
9% of EPS growth. While management has recognized that it needs to return the soup
category to growth after ten years of running it for profit, we fear that the size of the investment
will prove insufficient to fully address the structural challenges facing the Campbell brand.
Consumer preferences have shifted away from canned soups (which are roughly 30% of sales
and over 40% of profits) and V8 beverages in favor of fresher products with healthier, organic-
ingredient profiles. In addition we foresee integration issues on the horizon for the integration of
the Snyder’s-Lance business, which has a track record of losing pricing power with retailers and
7 January 2020
2020 Packaged Foods Preview 38
running into operational problems at its manufacturing facilities. Campbell’s poor track record of
acquisitions (which include Bolthouse Farms, Garden Fresh, and Erasco) increases the
integration risk.
B&G Foods (Underperform, $14 Target Price): We view B&G as ill-equipped to adjust to
the more demanding retail environment. Its traditional “manage for cash” playbook does not
appear robust enough to keep up with big competitors ramping up their investments and big
retailers’ demands for growth. For example, its most important growth vehicle, Green Giant
frozen vegetables, has lost shelf space to private label and Conagra’s Birds Eye this year and is
now in decline. Generally speaking, we struggle to understand how the company can execute
its acquisition strategy, maintain such a high dividend (payout ratio of 90%), and carry so much
debt on the balance sheet at the same time.
Kraft Heinz (Underperform, $27 Target Price): We expect a challenging road ahead for
Kraft Heinz as it tries to transform from what was originally conceived as a cost-cutting/M&A
vehicle into a company that can generate organic growth. Even if the new CEO Miguel Patricio
gets permission from the board to increase investment spending behind the antiquated brands
to do it, the progress undoubtedly will be slow. About 44% of Kraft Heinz’s U.S. retail portfolio
competes in commoditized categories (cheese, meats, coffee, and nuts) where the company
has been losing share to private label or more on-trend brands.
Near-term, we see downside risk to the stock from another dividend cut. If the board keeps the
dividend at the current level, the debt rating agencies are threatening to cut the company’s
rating below investment grade unless EBITDA shows signs of stabilization. This would increase
the company’s cost of capital, increase the risk profile of the business, and pose as a significant
obstacle to the company’s vision for further M&A.
7 January 2020
2020 Packaged Foods Preview 39
Large-Cap Food Bull and Bear Cases
Campbell (Underperform Rating, $43 Target Price)
Our $43/share target price assumes a 16x P/E multiple against our forward 12-month forward
EPS estimate. This represents a 4% discount to packaged foods peers compared to a 6%
discount historically. An unexpectedly positive response in soup from management’s turnaround
efforts represents the biggest upside risk to our rating and target price.
Bull-Case
Portfolio of Big Important Brands with Operating Scale
Campbell maintains significant leadership and scale in important categories such as soup,
biscuits, and vegetable juice with iconic brands including Campbell's, Snyder’s-Lance,
Pepperidge Farm, and V8. The Dorrance family still controls the board and continues to operate
with a long-term perspective. This ought to provide the new CEO, Mark Clouse, with a long
runway to overhaul Campbell’s brands.
Opportunity for Synergies to Improve Margins
Snyder’s-Lance business’ 9% EBIT margin is substantially lower than Campbell’s 16% base
business margin. Margins could move much higher if Campbell’s management were to fix
Snyder’s-Lance's underlying supply chain problems, improve overhead efficiency and perhaps
sell the low-margin snack nuts business.
At its investor day, management outlined its plans to generate an additional $315M in synergies
out of its planned $850M (ex C-Fresh) by FY22, with over 60% from Snyder’s-Lance and the
rest from the enterprise cost saving program (ECSP). The company is ahead of plan in FY 20
having delivered $45M in 1Q20 and raising its FY 20 guidance to $140-$150M (from $140M).
ECSP will derive $50M of its savings network optimization, which includes the closure of the
Toronto soup manufacturing plant as production moves to the US.
Management indicated that Snyder’s-Lance synergies will derive from (i) Manufacturing; (ii)
Warehouse & Distribution; (iii) Procurement and (iv) Sales Initiatives. We estimate the timeline
for incremental savings per year as: (1) FY20: $140 - $150M; (2) FY21: $80M to $100M and
(3) FY22: $75M - $85M.
Management Will Be Investing $70M over 3yrs to Stabilize Soup
After more than three years of large soup sales declines, management has underlined soup
stabilization as a ‘top priority.’ Instead of running it for cash as it did over the last 10 years,
management plans to invest $70M into the category over the next 3-yrs. In order of magnitude,
this investment includes (1) a 2-point expansion of marketing expenses, (2) investment in
product quality; and (3) investment in price. CEO Clouse stated that retailers have responded
positively to Campbell’s intentions to return the category to growth. This might be a sign that
retailers will give more leeway as it works to restore the business and develops new product
innovations.
Potential for Positive Earnings Revisions
Campbell stock has gained favor with investors because CEO Mark Clouse and the
management team have done a good job of setting more reasonable expectations for growth
and providing sufficient cushion for positive earnings revisions. Since Clouse joined the company
in January 2019, the company has beaten quarterly estimates four quarters in a row.
The board, which is still controlled by the Dorrance family, might be learning to take a more
shareholder-friendly approach as well. Before Clouse joined the company, the interim CEO
lowered the earnings base and the margin structure for the Meals and Beverage division to a
significant degree. This set the table for Clouse to return the company to re-establish a pattern
of beating expectations in FY 19 even though the company’s profits still declined. Following the
conclusion of activist investor Third Point’s proxy battle with Campbell in 2018, the board has
made some positive changes to its structure, in our view.
7 January 2020
2020 Packaged Foods Preview 40
Bear Case
Soup Investment of $70M is Appears Too Small
Consumer preference has shifted away from canned soups (which are roughly 30% of sales
and over 40% of profits) in favor of fresher soups and healthier, organic-ingredient profiles.
Campbell’s repeated attempts to introduce a convincing organic version of its Campbell branded
soup is a good example of how difficult it is for heritage brands to adapt to changing consumer
preferences. Consumers still eat soup but they have shifted to higher quality foodservice
formats and paper packaging. Within canned soup, we believe private label has narrowed the
quality gap with the Campbell’s brand. Frankly, we were surprised to see that new management
did not spend more time addressing this issue or providing more data that measures consumers’
perception of Campbell’s taste or quality.
Unclear How Patient Retailers Will Be with Soup Turnaround
In our view, there is still substantial risk that retailers will reduce the enormous shelf space they
dedicate to canned soup (why does it need 70-80 SKUs?) in favor of more on-trend offerings.
In the near-term, the company does not appear to have much excitement planned for fiscal
2020. Expansion of bone broth and soup-to-go offerings (which has been around for years) is
not enough to move the needle, in our view. Recall that Walmart severely penalized Campbell in
2017 – 2018 when Campbell refused to provide sufficient promotional support.
Integration Risk Is Higher than the Street Realizes
In our December 2018 report, we noted that Campbell has the weakest M&A track record
relative to its peers with only 9% of acquisitions over the past 6-yrs meeting or exceeding
expectations. Since Snyder’s-Lance arrived with pre-existing problems (including poor capacity
utilization and ineffective marketing investment), we believe this integration will pose an even
bigger challenge than what Campbell has faced in the past.
Campbell has chosen not to provide pro forma sales or profit trends for Snyder’s-Lance. This
makes it difficult to fully evaluate Campbell’s progress with the business. For example,
management stated it achieved its target for year one and that it is on track for its three-year
savings plan, but recall that the company lowered its Snyder’s-Lance target only two months
after announcing the transaction in December 2017 and then lowered its sales target again in
May 2018 due to unfavorable price contracts with customers.
Additionally, we foresee significant cost, legal challenges, cultural risk, and execution risk in the
future for this integration. If Campbell tries to consolidate its three DSD networks, it will need to
break the contracts of many of the independent Pepperidge Farm route operators and buy out
the routes. The Pepperidge Farm operators will resist these efforts because they have held
contracts for their routes for 20-30 years.
7 January 2020
2020 Packaged Foods Preview 41
Figure 49: We Estimate That Roughly 45% of Campbell’s Portfolio Is Structurally Challenged ($M)
Source: Company data, Credit Suisse estimates. Nielsen xAOC+C
Conagra Brands (Neutral Rating, $32 Target Price)
Our $32/share target price is based on a 14.4x P/E multiple against our FY 21 estimate of
$2.22. This assumes a 15% discount to closest food peers, which is significantly higher than its
Good 2015 2016 2017 2018 52 wks
% of Total
Sales 2019 3yr CAGR 2019 Growth
Goldfish 784 832 872 873 926 10.2% 3.6% 6.2%
Prego 465 502 522 519 532 5.9% 2.0% 2.5%
Lance 417 448 464 486 496 5.5% 3.4% 2.1%
Other Brands 195 332 354 351 360 4.0% 2.7% 2.4%
Cape Cod 246 259 271 277 281 3.1% 2.7% 1.4%
Snack Factory 193 210 223 222 229 2.5% 3.0% 3.6%
Kettle 180 191 202 209 205 2.3% 2.5% -2.2%
Pacific Foods 113 125 135 146 135 1.5% 2.5% -8.2%
Late July 29 42 58 80 91 1.0% 30.1% 15.8%
SubTotal 2,622 2,940 3,100 3,162 3,255 35.8% 3.5% 2.9%
Stable 2015 2016 2017 2018 52 wks
% of Total
Sales 2019 3yr CAGR 2019 Growth
Pepperidge Farm Bread 950 933 922 942 974 10.7% 1.4% 3.6%
Snyder's of Hanover 499 483 505 484 470 5.2% -0.9% -2.8%
Spaghettios 128 128 135 134 133 1.5% 1.3% -1.0%
Emerald 127 124 116 118 124 1.4% -0.2% 4.9%
Jays 65 65 63 63 64 0.7% -0.6% 1.9%
SubTotal 1,769 1,735 1,741 1,742 1,766 19.4% 0.6% 1.5%
Challenged 2015 2016 2017 2018 52 wks
% of Total
Sales 2019 3yr CAGR 2019 Growth
Campbell's Soups 1,475 1,320 1,272 1,184 1,165 12.8% -4.1% -2.3%
V8 852 789 741 718 688 7.6% -4.4% -4.2%
Chunky Soup 537 534 538 523 511 5.6% -1.5% -3.0%
Swanson 517 527 502 507 510 5.6% -1.1% 0.5%
Campbell's Other Non-Soup Brands 345 342 339 328 307 3.4% -3.5% -6.7%
Pepperidge Farm Cookies 278 280 273 280 270 3.0% -1.2% -3.4%
Pace 255 266 256 257 256 2.8% -1.2% -0.2%
Pop Secret 241 212 189 169 169 1.9% -7.2% 0.2%
Plum 118 138 128 126 115 1.3% -5.9% -8.9%
Tom's Snacks 78 84 81 79 75 0.8% -3.5% -5.1%
SubTotal 4,696 4,491 4,319 4,172 4,068 44.8% -3.2% -2.8%
Total Campbell Sales 9,088 9,166 9,160 9,076 9,089 100.0% -0.3% 0.0%
7 January 2020
2020 Packaged Foods Preview 42
0% 5-year average. Continued improvement in the company’s revenue growth represents the
biggest upside risk to our target. Inability to de deliver synergies as planned poses the biggest
downside risk to due to the high degree of financial leverage.
Bull-Case
Strong Management Track Record, Prior to Pinnacle Acquisition
After assuming the CEO role in 2015, Sean Connolly led a highly impressive business
turnaround and cultural transformation by moving Conagra’s headquarters out of Omaha to
Chicago, selling or spinning off noncore businesses, and establishing a healthier base of sales
by walking away from unprofitable discounting. Resonant product innovation catering to
demographic trends, premium-ization, revamped packaging, and on trend ingredient usage led
to strong consumption at a time when the broader packaged food industry was struggling.
These initiatives gave Conagra “permission” to sell more at a full price and escape the
uneconomic pattern of deep discounts to drive volume.
Leadership and Scale in Frozen Foods
With the Pinnacle Foods acquisition, Conagra has become the number-two player in the frozen
market, similar in size to market leader Nestle. It has an excellent opportunity to capitalize on
Nestle’s recent pullbacks in the U.S. frozen aisle and Kraft Heinz’s operational distractions. For
example, Nestle recently exited its DSD network in the frozen aisle and sold its ice cream
business. Retailers theoretically should give Conagra more favorable merchandising support at
the expense of these two competitors.
Additionally, the Conagra management team has also demonstrated to retailers that it has the
ability to turn around antiquated brands and drive profitable growth. For example, management
successfully refreshed Healthy Choice, Banquet by refreshing the package, adding higher
quality ingredients and improved marketing. This should make retailers more willing to give
Conagra some wiggle room as it rebuilds Pinnacle’s product line up.
Better-than-Expected Distribution Trends
In late October, we were feeling very cautious about Conagra’s future prospects in the frozen
aisle at Walmart because we found that Walmart had accepted only 33-40% of Conagra’s new
items as part of a shelf reset and that Conagra’s Birds Eye vegetables had lost shelf space to
private label. That was the case at the time, but our recent store checks and the company’s
strong 2Q results suggest that Conagra may have picked up enough new facings on its top
selling items to offset the distribution it lost or failed to achieve. On its last earnings call,
management provided sufficient evidence regarding Birds Eye’s overall distribution trends (now
flat vs. prior year compared to -10% last quarter) and frozen meals distribution (up 1.2 share
points, from 0.6 in 4Q) to assuage some of our concerns. In addition, our recent store checks
at Walmart, although limited in scope, did not find evidence that Conagra’s overall “facings” had
declined following the reset.
Visibility Improving, Synergies Revising Higher
Management’s conviction that its organic sales growth will improve sequentially in 3Q compared
to 2Q was surprising and hard to refute: 1) in stark contrast to the pull back on Pinnacle
merchandising last year, new product activity for the brands in 3Q is expected to accelerate; 2)
Hunt’s and Chef sales are improving; 3) the headwind from retailer investment spending is
dissipating; and 4) the core Conagra business is more likely to have a “normal” comparison.
Management also raised its synergy target by $20M, thus providing more flexibility for
reinvestment.
Opportunity for Value Creation Through Divestitures
Conagra Brands holds a valuation allowance of about $1 billion for a tax asset that was
generated from the loss realized on the sale of its Private Brands operations. This will enable
the company to divest structurally declining brands or perhaps exit its stake in the Ardent Mills
7 January 2020
2020 Packaged Foods Preview 43
joint venture in a tax-free manner. It has already announced the divestitures of Wesson, Gelit,
the DSD snacks business at Pinnacle, and private label peanut butter.
Bear Case
Difficult to Manage a Highly Fragmented Portfolio with So Many Off-Trend Brands
A significant percentage of Conagra’s highly fragmented portfolio of 100 brands is either off-
trend with consumers (like Chef Boyardee, Hunts, and Orville Redenbacher) or targeted to
consumers with low purchasing power (like Banquet).
Given these vulnerabilities, there is significant risk that the challenges facing Pinnacle will
distract management from the core business and cause execution missteps. These concerns
played out in the 4Q19 and 1Q20 sales miss relating to Marie Callender’s, Duke’s, P.F.
Changs, and Hunts brands. Management called these issues “transitional,” but it might be an
early indication of more challenges in the core business to come. If a “good” business like
Pinnacle can turn into a “bad” one so quickly in today’s challenging business environment (as
management found soon after closing the transaction), why should we feel comfortable that the
core Conagra business won’t experience the same problem?
Pinnacle in Worse Shape than Conagra Expected
Conagra stock fell significantly in December 2018 after management-slashed expectations for
Pinnacle’s operating margin by about 350 basis points to 14.6-14.9% and stated sales will
likely decline 5% in 2019. This equates to a reduction of about $120M in profit. CEO Sean
Connolly blamed the reductions on a litany of product innovation missteps and unprofitable trade
promotions by the prior management team. Whether intended or not, the severity of the cut
sent a signal to investors that management walked into a bad deal and overpaid, even though it
had plenty of time to evaluate the risks and rewards of pursuing the deal. It is taking a lot of
work and time to regain investor confidence in the transaction.
Despite the major reduction to Pinnacle’s year one expectations, management told the Street
that it can still achieve its three-year financial targets for the Pinnacle acquisition. It has now
steadily increased expected synergies from 8% of Pinnacle’s sales ($215M) to 9% and then,
most recently, to over 10% ($305M). Management said it would reinvest the most recent
increase back in the business (about $20M), but by our math the majority of the savings is
expected to drop directly to the bottom line. Also, management said that it intends to shave its
CapEx spending to maximize cash flow for debt reduction.
Even investors who have a positive opinion of CEO Connolly felt whipsawed by his surprisingly
negative commentary regarding the condition of Pinnacle’s business. However, as shown in the
chart below, they also took some comfort knowing that Connolly has a track record for reducing
expectations after stepping in to take control of businesses and then handily beating those
expectations. This was the case in his first full year as CEO of Conagra in fiscal 2017 and his
first full year as CEO of Hillshire Brands in fiscal 2013. We attribute this pattern to the
importance Connolly puts on beating expectations and his willingness to make radical changes
to companies that do not fit his operating model.
7 January 2020
2020 Packaged Foods Preview 44
Figure 50: CEO Sean Connolly Introduced a Low Guidance Range in His First Years at
Conagra and Hillshire Brands and then Beat the Range
Source: Company data, Credit Suisse estimates
In this environment, it sounds a bit scary when a business with declining sales responds by
stepping on the cost-cutting accelerator instead of reinvesting in the business. Recall that
Pinnacle was already operating in a highly lean manner when Conagra bought it and that it had
cut SG&A by almost $80M since 2016. As a result, we worry that Conagra will need to reinvest
more of the synergies than it expects to stabilize Pinnacle’s declines and compete with B&G
and Nestle in the frozen aisle.
Category “Captaincy” Has Not Provided as Much Leverage as Expected
One of the main benefits of the Pinnacle acquisition was that it was supposed to make Conagra
the leader in frozen meals and vegetables and as such provide negotiating leverage with its
retailer customers. However, as Walmart has taken more control over its category management
decisions, Conagra’s influence appears to have waned. We find it very curious that Walmart
rejected most of Conagra’s new product recommendations and increased space for private label
vegetables during it October shelf reset. Conagra didn’t lose any shelf space, but it certainly
didn’t gain any either. We believe these decisions were part of a broader strategy at Walmart to
reduce SKU proliferation and improve e-commerce execution at its brick-and-mortar stores.
Whatever the reason, Walmart’s initial resistance to Conagra’s new product recommendations
and its commitment to private label suggest to us that Conagra’s ability to control its own
destiny in the frozen aisle is not what it expected.
Hillshire FY12 FY13* FY14
Actual EPS 1.55$ 1.72$ 1.72$
CS Est. 1.55$ 1.52$ 1.67$
Positive Revision 13% 3%
*Management guidance of $1.40-$1.55 for FY 13 announced August 2012 was well below consensus
Conagra FY15 FY16 FY17 FY 18
Actual EPS 2.18$ 1.30$ 1.74$ 2.11$
CS Est as of 11/15/16 1.67$ 1.84$
4% 15%
Pinnacle
Trailing 12
months prior
to acquisition
First 12 months
(estimate)
FY 22
(implied
estimate)
Sales ($M) 3,174 2,886 3,000
Operating Profit 584 457 700
OP Margin 18% 16% 23%
7 January 2020
2020 Packaged Foods Preview 45
Figure 51: We Estimate That Roughly 45% of Conagra’s Portfolio Is Structurally Challenged ($M)
Source: Company data, Credit Suisse estimates, Nielsen xAOC+C
Good 2014 2015 2016 2017 2018
L52
Week
% of Total
Sales
3-Yr
CAGR
52wk
Growth
Slim Jim 531 580 577 552 562 595 4.8% 1.1% 6.2%
Healthy Choice 456 421 401 417 502 545 4.3% 10.8% 9.8%
Reddi Wip 228 255 280 291 291 297 2.5% 2.0% 2.2%
P.F. Chang's 128 156 149 154 174 194 1.5% 9.0% 12.1%
Angie's 47 61 72 100 123 138 1.1% 24.2% 13.8%
Gardein 41 54 69 92 118 124 1.0% 21.7% 5.1%
EVOL. 46 68 78 90 84 73 0.7% -2.6% -14.4%
BIGS 38 48 58 64 68 72 0.6% 7.9% 7.8%
Earth Balance 41 49 51 55 60 60 0.5% 5.3% -0.8%
Sub Total 1,558 1,692 1,735 1,816 1,982 2,097 17.0% 6.5% 6.4%
Stable 2014 2015 2016 2017 2018
L52
Week
% of Total
Sales
3-Yr
CAGR
52wk
Growth
Birds Eye 1,031 1,116 1,198 1,294 1,361 1,333 11.7% 3.6% -2.0%
Marie Callender's 1,002 1,005 1,008 1,010 1,022 1,013 8.8% 0.2% -1.3%
Banquet 1,064 964 818 763 827 869 7.1% 2.0% 6.0%
Vlasic 290 297 294 290 297 299 2.5% 0.5% 0.7%
Hungry-Man 212 207 217 208 202 191 1.7% -4.1% -5.5%
PAM 173 185 188 184 187 188 1.6% 0.1% 1.0%
Bertolli 250 217 196 183 167 160 1.4% -6.5% -4.8%
Swiss Miss 171 153 145 138 151 153 1.3% 1.7% 2.4%
Act II 102 106 103 101 110 123 0.9% 6.1% 12.9%
Manwich 91 86 84 80 82 84 0.7% -0.2% 2.8%
Sub Total 4,387 4,335 4,251 4,251 4,405 4,414 37.7% 1.3% 0.3%
Challenged 2014 2015 2016 2017 2018
L52
Week
% of Total
Sales
3-Yr
CAGR
52wk
Growth
Other Brands 2,217 1,852 1,818 1,718 1,677 1,637 14.4% -3.4% -2.7%
Hunt's 652 645 621 567 558 514 4.8% -6.1% -8.5%
Chef Boyardee 520 519 480 461 462 440 4.0% -2.8% -4.8%
Orville Redenbacher's 316 292 278 260 271 271 2.3% -0.8% 0.5%
Snack Pack 249 243 230 221 220 231 1.9% 0.2% 5.2%
Odom's Tennessee Pride 221 234 228 221 216 212 1.9% -2.4% -3.0%
Herbrew National 230 219 217 205 202 192 1.7% -3.9% -4.9%
Wish-Bone 221 212 212 196 170 158 1.5% -9.3% -8.5%
Blue Bonnet 195 195 189 180 166 161 1.4% -5.2% -3.5%
David 182 175 160 146 139 144 1.2% -3.5% 3.7%
Peter Pan 187 178 176 166 157 139 1.3% -7.6% -11.8%
UDI's 142 173 176 161 152 128 1.3% -10.2% -16.8%
Smart Balance 230 182 151 134 124 115 1.1% -8.8% -7.8%
Libby's 106 107 101 97 99 100 0.9% -0.4% 0.5%
Lender's 92 89 84 81 81 77 0.7% -3.0% -5.3%
Mrs. Butter-Worth's 81 81 76 74 73 69 0.6% -3.0% -6.2%
La Choy 84 82 82 76 73 68 0.6% -6.1% -6.7%
Egg Beaters 125 132 120 92 77 64 0.7% -18.7% -17.8%
Glutino 72 68 71 67 64 50 0.5% -10.7% -20.9%
Duncan Hines 336 312 296 330 308 267 2.6% -3.4% -14.1%
Sub Total 6,459 5,989 5,764 5,453 5,289 5,035 45.3% -4.4% -5.1%
Total Conagra 12,404 12,017 11,750 11,520 11,676 11,547 100.0% -1.0% -1.1%
7 January 2020
2020 Packaged Foods Preview 46
General Mills (Neutral Rating, $56 Target Price)
Our $56/share price target implies a 15.8x multiple on our forward 12-month EPS estimate,
which is a 3% discount to its peers, in line with its 5-yr average. Dilutive divestitures or changes
in consumer sentiment for Blue Buffalo represent the biggest risk to our target price.
Bull-Case
Strong Portfolio of Leading Brands
With $17 billion in sales and historically strong growth rates, General Mills has leading positions
in the U.S. and in global cereal, yogurt, and snack bar categories. Its stable of eight $1 billion
brands includes Cheerios, Nature Valley, Yoplait, Pillsbury, Blue Buffalo, Betty Crocker,
Haagen Dazs (international license only), and Old El Paso. It also has a long-standing joint
venture with Nestle in global cereal. After doing a good job of expanding into the natural and
organic products category by acquiring Annie’s, Epic, and Larabar, it has now diversified into
pet food by buying Blue Buffalo, a leading premium dog food brand.
It describes cereal and pet as its “highest return” categories (15% and 8% of sales), yogurt as a
high priority category (12% of sales and declining) and snacks, ice cream, Old El Paso meals,
and natural & organic (25%) as its “accelerate for growth” categories.
Sales Trends in North America Stabilized
We think the company is taking a more realistic approach to its investment and growth
expectations for North America Retail. After several years of decline, the North America Retail
business (80% of sales) is finally showing signs of stabilization with organic sales flat in the
1H20. The Cereal division has gained share owing to effective product innovation and, to some
degree, the struggles at its biggest competitor Kellogg. Old El Paso, Pillsbury, and Progresso all
had a strong first half while declines in Fiber One and Nature Valley began to diminish.
Management runs this division with the expectation that it can keep pace with category growth,
which is about 1%.
Margins are expanding again due to the mix towards cereal and the effective use of Holistic
Margin Management practices. It is also possible that the company’s increased investment in
revenue management, data analytics, and e-commerce (which largely falls under the heading of
unallocated corporate expense) is having a positive impact on this division’s operating
effectiveness.
Successful Expansion of Blue Brand Into Mass
Since the acquisition, General Mills has done a good job of overseeing Blue Buffalo’s broader
expansion into the broader FDM (food, drug, and mass) channel, especially Walmart. Overall
retail sales are growing at a low double-digit rate, with the gains in FDM more than offsetting
the declines in Blue’s heritage pet specialty channel. This includes a 45% growth rate at FDM
retailers where the brand has been in distribution for over 12 months (meaning excluding
Walmart). Household penetration (now at 9.8%) has increased at a pace of 1.8% per year over
the past two years compared to only 0.7% when it was limited to pet specialty retailers. We
estimate that Blue’s sales at Walmart will generate $140M on an annual basis, including an
outsized fiscal 4Q19 of $50M to fill Walmart’s shelves and distribution centers
Management expects General Mills’ margins to move higher owing to a reduction in Buffalo co-
packing as it opens new production facilities and realizes its $50M of planned synergies from
freight and ingredient purchasing.
Bear Case
Risks to FY20 Forecast is Rising
While other food stocks appear poised for positive earnings revisions, we think GIS is heading in
the opposite direction. The International and Convenience & Food Service divisions both missed
7 January 2020
2020 Packaged Foods Preview 47
expectations in 1Q20 and U.S. yogurt is now behind its plan as well. In addition, the company’s
Snack division was still in negative territory in 2Q and the Pet Food division is now facing a
potential shift in consumer attitudes toward grain-free formulations. We think General Mills is a
higher quality company than its peers with higher quality earnings, but we don’t think the stock
can move higher when earnings estimates go lower.
Slow-Down in Grain-Free Pet Food
Management said that its Blue Buffalo brand (up low DD% at retail) has not experienced any
negative impact from the FDA’s recent investigations into a possible connection between grain-
free pet diets and canine dilated cardiomyopathy (DCM). However, it acknowledged that the
growth rate of the sub-category has slowed. The FDA research falls short of drawing a causal
effect, but a change in consumer sentiment presents a considerable risk to Blue’s growth rate
longer-term. Since its inception, the Blue brand has built its positioning on the benefits of grain-
free formulations and actively compared its ingredient statements to grain-based competitors in
its advertising. Uncertainties regarding this issue have created a bigger overhang on the stock
than we expected.
Blue Buffalo’s Expansion into Mass Poses Risks
Management has clear visibility into near-term distribution gains at Walmart and other mass
retailers. However, in the longer term, we question whether Blue’s expansion into wet dog food
and pet snacks will be as successful as management expects. These sub-categories tend to be
less “sticky” in terms of generating repeat purchase and it is more difficult to create
differentiated products. Consumers tend to be less brand loyal in these subcategories than they
are in dry pet food, which is Blue’s core. They may give Blue’s offerings a try, but the repeat
rates will be lower than normal.
We are also concerned that Blue’s sales in the Specialty channel (approximately 45% of sales)
will continue to decline by double digits owing to a backlash from retail operators in the channel
and cannibalization of consumer demand. Management insists that the growth in FDM will far
outweigh the sales it loses in Specialty, but this should become very hard to do once the
company laps the initial Walmart distribution gains. Blue launched a new brand called Carnivora
into the Specialty channel to stem the declines, but it has not yet proven sufficient.
Potential for More Dilutive Divestitures
General Mills aims to divest 5% worth of company sales as it reshapes the portfolio to return to
growth. We would not be surprised if management decided to sell its Progresso or Hamburger
Helper brands. We are concerned that earnings dilution from a divestiture (similar to the Green
Giant divestiture in 2015) would hurt the stock and raise more questions about management’s
capital allocation choices. Paying 25x EBITDA to enter the pet food category with no operating
experience while divesting stable cash flow generators for 10x EBITDA considerably increases
the risk profile of the portfolio.
7 January 2020
2020 Packaged Foods Preview 48
Figure 52: We Estimate That Roughly 25% of General Mills' Portfolio Is Structurally Challenged ($M)
Source: Company data, Credit Suisse estimates. Nielsen xAOC+C
Hershey (Neutral Rating, $155 Target Price)
Valuation
Our $155/share 12-month target price is based on a 24x P/E multiple against our
forward estimate, in-line with the stock’s current P/E valuation. While this multiple is at
the very high end of its historical range, we think the strong franchise value of the
Good 2015 2016 2017 2018 L52 Wks
% of Tota l
2019 Sales
3-Yr
CAGR
L52 Wks
Growth
Blue Buffalo 0 2 63 283 579 4.6% 604% 115%
Old El Paso 481 490 505 532 559 4.5% 5% 6%
Annie's 232 312 354 352 343 2.7% 3% -2%
Larabar 86 123 164 191 180 1.4% 14% -5%
Gardetto's 108 115 116 115 121 1.0% 2% 6%
Mott's Fruit Snacks 69 78 96 102 104 0.8% 10% 2%
Fruit Gushers 85 76 79 91 102 0.8% 10% 14%
Epic 2 8 17 30 45 0.4% 81% 59%
Subtotal 1,063 1,203 1,394 1,696 2,034 16.3% 19% 45%
Stable 2015 2016 2017 2018 L52 Wks
% of Tota l
2019 Sales
3-Yr
CAGR
L52 Wks
Growth
Breakfast Cereal 2,977 2,902 2,819 2,776 2,856 22.9% -1% 3%
Pillsbury 1,754 1,673 1,582 1,611 1,601 12.8% -1% 0%
Nature Valley 981 980 1,036 1,014 952 7.6% -1% -6%
Totino's 946 905 906 959 974 7.8% 2% 2%
Chex Mix 376 343 331 329 336 2.7% -1% 3%
Gold Medal 166 150 149 152 154 1.2% 1% 3%
Betty Crocker Super Moist 141 146 143 144 150 1.2% 1% 5%
Other General Mills 129 98 94 107 113 0.9% 5% 6%
Fruit Roll-Ups 67 67 71 71 70 0.6% 1% -1%
Fruit By The Foot 39 46 52 53 52 0.4% 4% -2%
Muir Glen 47 49 45 45 45 0.4% -3% 0%
Subtotal 7,625 7,359 7,227 7,261 7,302 58.5% 0% 155%
Challenged 2015 2016 2017 2018 L52 Wks
% of Tota l
2019 Sales
3-Yr
CAGR
L52 Wks
Growth
Yoplait 1,773 1,475 1,200 1,176 1,153 9.2% -8% -2%
Progresso 826 769 722 735 733 5.9% -2% -1%
Other Betty Crocker 881 773 658 627 623 5.0% -7% -1%
Hamburger Helper 202 198 195 177 173 1.4% -4% -3%
Fiber One 361 301 214 171 125 1.0% -25% -27%
Cascadian Farm 157 146 131 126 110 0.9% -9% -12%
Suddenly Salad 78 84 75 72 79 0.6% -2% 10%
Betty Crocker Rich & Creamy 57 56 55 53 55 0.4% 0% 5%
Mountain High 43 44 41 36 34 0.3% -9% -7%
Betty Crocker Delights 18 24 36 43 28 0.2% 6% -33%
Bisquick 21 19 18 17 18 0.1% -1% 11%
Liberte 24 20 14 15 13 0.1% -13% -11%
Subtotal 4,442 3,909 3,358 3,247 3,144 25.2% -7% -76%
Total 13,129 12,471 11,979 12,203 12,480 100.0% 0% -29%
7 January 2020
2020 Packaged Foods Preview 49
company and the likelihood of positive earnings revisions justifies the premium at this
time. Failure to return core confectionery sales to sustainable growth represents the
biggest risk to our target price.
Bull-Case
Market Leadership in an Advantaged Category
Confectionery remains a highly advantaged category in the packaged food industry. Per the
National Confectionery Association, it is the fourth biggest category in stores and among the 10
most profitable. Candy has high household penetration, caters to all ages and demographics,
and offers strong profit margins to the retailer. Consumers have an emotional attachment to
chocolate in particular that runs deeper than just about every processed category we can think
of.
Hershey is the market leader in the space and has the luxury of operating an enormously
popular brand. Research indicates it ranks in the top 10 of the most popular brands across the
entire consumer goods spectrum (not just food) and that it caters to all ages. Consumers
associate it with positive feelings and fun.
Figure 53: Hershey’s Brand Power Is an Important Factor in the Value of the Stock
Source: Tenet Partners, CoreBrand, Smarty Pants, Credit Suisse
Reinvestment Spending Has Improved Topline Growth
After years a couple of years of spending declines, Hershey is reinvesting in advertising to drive
sales growth. This included an 11% cut to spending in 2018 when it consolidated advertising
agencies and developed in-house media production capabilities. These investments boosted
Hershey’ confectionery growth rate back to 2.2% in 3Q and resulted in 17 bps of share gains.
The company’s organic growth rate has improved to 2.0% this year compared to 0.3% for the
past two years. Capacity expansion for the Reese’s and Kit Kat brands has enabled more
innovation flexibility, such as Reese’s Thins and Kit Kat Duos. We view the higher spending as
highly important to an impulse category like confectionery and as another sign of management’s
confidence in its business.
Resurgence of Pricing Power
Unlike most of the food industry, Hershey and Mars essentially enjoy a duopoly in mass
chocolate with practically no private label threat. In July 2018, HSY announced price increases
that equated to a weighted average of 2.5% consisting of higher rates for freight, a packaging
change for bags, and higher prices for King Size bars. Then in July 2019, it announced another
price increase equating to 2.3% consisting of an 8% increase on single-serve products, which
are 33% of the portfolio). Because the second price encompassed products with less seasonal
price protections, we expect to see 3-4% higher pricing in 1Q20 from a modest overlap of the
Top 100 Most Powerful
Brands in 2019 Rank
Top 50 Brands Among Kids
Ages 6-12 in 2019 Rank
Parents Most Loved
Brands in 2019 Rank
Coca-Cola 1 Youtube 1 Amazon 1
Apple 2 Oreo 2 Crayola 2
Walt Disney 3 M&M's 3 Netflix 3
Bayer 4 Hershey 4 Lion King 4
Microsoft 5 Doritos 5 Hershey 5
Pepsico 6 Chips Ahoy 6 Google 6
Johnson & Johnson 7 Netflix 7 Oreo 7
Google 8 Cheetos 8 Reese's 8
Hershey 9 Lays 9 M&M's 9
American Express 10 Goldfish 10 Toy Story 10
7 January 2020
2020 Packaged Foods Preview 50
two price actions. Management said that this will consist of one-third of the 2018 price increase
and perhaps 1.0% from the 2019 price increases.
Figure 54: Expected Price Increases
Source: Company data, Credit Suisse estimates. 3Q19 negatively offset by price protection credits.
E-Commerce Risk, Not as Bad as Feared
With the growth of e-commerce grocery delivery versus in-store, we initially believed that the
shift in shopping patterns to more convenient methods such as online and click-and-collect will
gradually reduce the number of impulse purchase occasions for confectionery products
merchandised at traditional checkout aisles. However, the company’s strong e-commerce
trends have alleviated our concerns. After years of underinvestment, the company has hired
talented executives from the outside to develop a strong e-commerce platform and integrate it
into the business units. Hershey’s e-commerce sales grew 50% in 3Q and its market share
over other confectionery companies grew 610 bps.
Insights we picked up from and our visit to the Groceryshop Expo and the National Association
of Convenience Stores Trade Expo also supported a more constructive view on Hershey. Brick-
and-mortar stores has actually increased y/y even though e-commerce continues to grow. This
is a big positive for impulse purchase categories like Hershey’s. A big reason for the increase is
that click-and-collect customers like to park their cars and enter the stores to do additional
shopping. Hershey has leveraged this insight to persuade retailers to increase candy placement
locations so as not to lose a potential sale.
Bear Case
Valuation Is Stretched
The stock is trading at all-time highs and is up 58% over the past year. Over the past 32 years
(using monthly data), it has only traded at this this level 5% of the time. Its forward P/E is
trading at 25.5x which is a 23% premium to its 10 and 20 year average (20.7x and 20.6x)
Price Increases May Not Be as Robust as Expected
Hershey’s pricing power in the chocolate category is impressive, but its negotiating power with
retailers is not absolute. For example, when HSY announced price increases in July 2019,
some distributors and retailers accurately anticipated it and overloaded on inventory at the
original price. To prevent excess inventory from buildng further at the trade, management pulled
forward its credit terms earlier in 3Q. This created a mismatch between the price credits it
extended and the volume it actually sold to customers in 3Q. As a result, retailers captured a
bigger portion of the pricing benefit in the category than Hershey, and investors, expected.
Expansion Into Snacking Facing Some Challenges
The confectionery category’s growth rate has slowed in recent years as consumers have shifted
their snacking habits to less sugary snacking options. Hershey management has responded by
making adjacent snacks a big priority. Through the acquisition of Amplify (SkinnyPop) and
Pirate’s Booty, Hershey has established a $600M business platform outside of its core
confectionery business to mitigate pressure on confectionery from consumers shifting to
healthier snacking. To further grow the platform, it recently announced the acquisition of low-
3Q18A 4Q18 1Q19A 2Q19A 3Q19A 4Q19A FY19E 1Q20E 2Q20E 3Q20E 4Q20E FY20E
July 2018 Price
Increases 2.5%-1.2% -0.8% 0.2% 1.2% 1.1% 2.5% 1.5% 2.5% 0.0% 0.0% 0.0% 0.6%
July 2019 Price
Increase 8% on
1/3 of products
(Single-Serve)
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.3% 2.0% 2.0% 0.7% 1.5%
Total -1.2% -0.8% 0.2% 1.2% 1.1% 2.5% 1.5% 3.8% 2.0% 2.0% 0.7% 2.1%
7 January 2020
2020 Packaged Foods Preview 51
sugar, high protein ONE brands (about $100M in sales) and two minority investments in Fulfil
nutrition bars in the UK and Blue Stripes Cacao shop.
Hershey has tried several times in the past to extend itself outside of core confectionery, but it
has never gained much traction. Its sales trends this year indicate that its latest attempt might
be facing similar challenges. The SkinnyPop brand has performed very well, but Pirate’s Booty’
sales have been declining due to distribution losses during the sales force transition.
BarkTHINS has turned sharply negative as well after several years of growth. Overall, we
believe Hershey’s snacking business (as defined by management) will struggle to achieve the
6-8% organic growth rate that management expects for it.
7 January 2020
2020 Packaged Foods Preview 52
Figure 55: We Estimate That Less than 15% of Hershey’s Brands Are Structurally Challenged ($M)
Source: Nielsen xAOC+C, Credit Suisse estimates
$ Sales Basis (MM)
Good 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of Total
Sales
3-Yr
CAGR
1-Yr
Growth
YTD
Growth
Reese's 1,823 1,927 2,015 2,046 2,205 2,032 25% 5% 9% 9%
Ice Breakers 442 475 485 524 541 520 6% 4% 4% 4%
Skinny Pop 179 222 252 279 306 277 4% 11% 11% 10%
Cadbury 251 251 258 246 272 246 3% 3% 11% 11%
Pirate's Booty 82 86 88 96 93 95 1% 3% -2% -2%
Bark Thins 22 35 44 56 50 56 1% 13% -10% -11%
Oatmega 2 12 21 22 16 23 0% 10% -29% -29%
Bubble Yum 14 17 17 18 19 18 0% 3% 6% 7%
Paqui 1 5 14 12 14 12 0% 40% 16% 21%
Subtotal 2,816 3,030 3,195 3,298 3,517 3,279 40% 5% 7% 7%
Stable 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of Total
Sales
3-Yr
CAGR
1-Yr
Growth
YTD
Growth
Hershey Chocolate 1,793 1,768 1,705 1,784 1,830 1,780 21% 1% 3% 3%
Kit Kat 647 683 689 692 666 692 8% -1% -4% -4%
Hershey Kisses 424 433 442 424 402 423 5% -2% -5% -7%
Hershey Syrups, Spreads, and Other 410 406 407 348 393 345 4% -1% 14% 14%
Twizzlers 331 302 299 291 295 291 3% -1% 1% 2%
Mounds and Almond Joy 202 201 194 199 206 198 2% 1% 4% 4%
Payday 159 162 159 158 159 159 2% -1% 0% 1%
Hershey's Nuggets 135 140 137 135 134 134 2% -1% -1% -1%
Heath 72 71 66 63 75 63 1% 2% 20% 22%
Hershey's Kitchens 59 56 54 56 56 55 1% 0% 3% 0%
Milk Duds 53 54 49 51 51 50 1% -2% 1% 0%
Hershey's Watchamacallit 46 45 42 40 44 40 0% -1% 10% 10%
Hershey's Symphony 36 35 34 34 34 34 0% -1% 0% 1%
Subtotal 4,367 4,356 4,276 4,276 4,345 4,264 50% 0% 2% 2%
Challenged 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of Total
Sales
3-Yr
CAGR
1-Yr
Growth
YTD
Growth
Jolly Rancher 233 214 204 196 195 196 2% -3% 0% 0%
York 221 191 170 153 154 154 2% -7% 0% 0%
Hershey's Cookies n Creme 175 166 159 145 139 146 2% -6% -5% -5%
Hershey's Gold 0 0 7 74 31 76 0% NA -59% -61%
Hershey's Cookie Layer Crunch 0 6 113 70 26 74 0% 60% -65% -66%
Breath Savers 83 77 87 76 69 77 1% -3% -10% -10%
Rolo 111 89 71 64 65 63 1% -10% 2% 2%
Brookside 180 138 92 67 59 68 1% -25% -13% -13%
Whoppers 82 74 71 66 67 67 1% -3% 0% 1%
Hershey's Take 5 34 50 50 38 42 38 0% -6% 11% 14%
Krave 41 63 59 45 28 46 0% -24% -39% -41%
Subtotal 1,160 1,070 1,084 993 876 1,007 10% -6% -13% -13%
Total Sales 8,343 8,457 8,555 8,567 8,738 8,549 100% 1% 0% 2%
7 January 2020
2020 Packaged Foods Preview 53
Hormel (Neutral Rating, $38 Target Price)
Valuation
Our target price of $38 and Neutral rating reflect a valuation multiple of 15x 2020E EBITDA.
This is a 10% premium over the five-year average. The loss of pricing power in Hormel’s value-
added products and volatility of input costs represent the largest risk to our target price and
rating.
Bull Case
Best Value-Added Protein Processor in the Industry
Hormel is the leading innovator of value-added products in the protein space with iconic brands
such as SPAM, Applegate, Hormel, and Skippy. Other protein companies have tried to follow
Hormel’s footsteps, but they lack its consumer-driven culture and product development
capabilities. For example, its Bacon 1 precooked bacon line took ten years to perfect and now
dominates the foodservice market. Management has done a good job of shifting its refrigerated
mix further toward value-added and away from commodity products. It sold Farmer John in
2016 and sold its Nebraska harvesting facility in 2018. By our estimates, these actions reduced
fresh pork volume by more than 60%. At the same time, it bought the premium retail deli brand
Columbus and the Fontanini foodservice business, both of which continue to perform well.
Hormel Can Raise Price to Fully Offset Inflation
Investors believe that Hormel can successfully offset any sort of cost inflation from African
swine fever (ASF), given the strong value-added brands that it has in the portfolio. The
company successfully accomplished this task in 2014, when the PED virus affected the U.S.
hog herd and caused commodity pork prices to shoot higher.
M&A Strategy Back on the Table
Hormel has very little debt on its balance sheet and is very active in terms of M&A. The
company could make an accretive acquisition and send earnings higher as a result. This may
impress the market and send the stock higher if it’s a synergistic acquisition. It has spent $1.4
billion since FY 17 on $640M of sales (Fontanini, Columbus, and Ceratti).
For illustrative purposes, management says that it could make a $3.5 billion acquisition at a 15x
EBITDA multiple and still have a debt-EBTIDA ratio of only 2.0x. Some investors view this as a
signal that it might be interested in buying Kraft Heinz’s $3B Oscar Mayer business (excluding
Lunchables) if Kraft Heinz is willing to sell it.
Bear Case
Turkey Division (17% of Sales) Remains Unpredictable
After a long period in the mid-to-high teens, this division’s profit margin has fallen back to the
7-9% range that it used to average before 2011. Some of this division’s problems were self-
inflicted, such as the product recalls and distribution losses that negatively impacted the past
two years. In addition, it looks like the turkey industry is beginning to reduce supplies to help
boost prices. While some may believe that these factors set up Jennie-O for a rebound year in
2020, we believe that its results will remain depressed due to the long amount time it takes to
regain shelf space at retail.
Hormel May Not Sufficiently Raise Price to Offset Inflation
The high likelihood of African swine fever-related pork input inflation in 2020 poses a very
difficult environment for Hormel because it will require big price increases on a wide variety of
Hormel’s product lines. Management has repeatedly said that it has the ability to raise prices on
its products to offset inflation because of its successful track record in the past. However, when
the company raised prices 5-15% across its product line in the middle of FY19, it ended up
losing share in many categories.
7 January 2020
2020 Packaged Foods Preview 54
Unfortunate Pattern of Over-Promises from Management Team
By our reckoning, FY19 marks the third year in a row that the company has missed its internal
operating profit metrics for incentive compensation. From what we have seen, a good portion of
the misses have come from unexpected cost inflation, thus making it very difficult for investors
to believe in the pricing power of Hormel’s value-added products and its strong Foodservice
division. We believe in the company’s intrinsic ability to achieve higher pricing power over the
course of time, but in our view management will need to provide more conservative expectations
how quickly it can get it done, as opposed to the 5-7% pre-tax profit growth it has currently laid
out for the year. For example, Refrigerated Foods’ profit (58% of total company) only grew 1%
in FY19, when inflation didn’t really materialize. Why should we feel comfortable that it will grow
any faster in FY20 when inflation inevitably accelerates?
Peanut Butter Remains a Headwind
Peanut butter prices for its Skippy business have remained depressed for the majority of FY19.
There have been zero indications from Hormel’s and Smucker’s management teams that pricing
can recover in the near-term, given that competition from private label remains fierce. As a
result, Skippy’s profitability is likely to remain a drag on Grocery Products’ profitability in FY20.
7 January 2020
2020 Packaged Foods Preview 55
Figure 56: We Estimate 30% of Hormel’s Retail Brands (Less Than 50% of Total Sales) Are Challenged. ($M)
Source: Nielsen xAOC+C, Credit Suisse estimates
Good 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of
Sales
3-Yr
CAGR
1-Year
Growth
Hormel Black Label 449 441 509 527 557 527 14% 8% 6%
Hormel Natural Choice 135 159 184 231 232 228 6% 13% 1%
SPAM 204 203 209 209 220 210 5% 3% 5%
Hormel Gatherings (Party Platters) 109 114 115 113 124 112 3% 3% 9%
Wholly Guacamole 91 101 121 126 128 126 3% 8% 1%
Columbus 78 91 106 112 120 111 3% 10% 7%
Dinty Moore 94 93 96 100 103 100 3% 3% 3%
Herdez 55 61 71 84 93 83 2% 15% 11%
Justin's 50 70 72 75 78 75 2% 4% 4%
Subtotal 1,266 1,334 1,482 1,578 1,656 1,571 41% 7% 5%
Stable 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of
Sales
3-Yr
CAGR
1-Year
Growth
Applegate 269 291 290 305 297 305 7% 1% -3%
Sliced Lunchmeat (HRL Brand) 277 270 271 283 281 282 7% 1% -1%
Hormel Chili 222 222 218 218 214 218 5% -1% -2%
Hormel Simple Ideas 111 108 109 111 114 110 3% 2% 3%
Hormel Compleats 130 115 114 113 111 113 3% -1% -1%
Mary Kitchen 71 70 69 72 73 72 2% 1% 2%
House Of Tsang 22 22 21 22 21 22 1% 0% -2%
Festive 20 15 16 19 20 19 0% 9% 6%
Stagg Chili 13 13 14 14 14 14 0% 1% 0%
Wholly Avocado 3 3 6 11 10 11 0% 41% -13%
Subtotal 1,121 1,113 1,108 1,142 1,132 1,140 28% 1% -1%
Challenged 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of
Sales
3-Yr
CAGR
1-Year
Growth
Jennie-O 670 656 645 643 562 646 14% -5% -13%
Skippy 328 353 348 347 334 346 8% -2% -4%
Other 326 305 287 245 237 249 6% -8% -3%
Always Tender 107 93 90 85 85 85 2% -3% -1%
Lloyd's Barbeque Company 93 88 88 86 84 86 2% -1% -2%
Hormel Bacon Toppings 75 78 64 61 60 60 2% -8% -1%
Hormel Potatoes 40 38 36 33 28 33 1% -9% -14%
Valley Fresh 32 20 22 21 20 21 1% 0% -6%
Herb-Ox 17 16 15 15 15 15 0% -3% -3%
Subtotal 1,688 1,647 1,595 1,536 1,425 1,543 36% -5% -7%
Total Hormel 3,940 3,944 4,007 4,059 4,006 4059 105% 1% -1%
7 January 2020
2020 Packaged Foods Preview 56
Kellogg (Outperform Rating, $78 Target Price)
Valuation
Our Outperform rating and target price of $78/share assumes an 18.5x P/E multiple against
our 2021 EPS estimate. This assumes that the stock’s valuation premium to its food peers
increases to 10% compared to a 0% premium today. With its organic revenue growth rate now
at 2%, we think Kellogg’s stock deserves to be placed in a higher valuation echelon among its
consumer staples peers. Continued weakness in the U.S. cereal business represents the
biggest downside risk to our target price.
Bull-Case
Leading Market Share in Important Global Categories
Kellogg maintains a leading position in a number of important food categories with a portfolio of
strong iconic brands such as Special K, Frosted Flakes, Pringles, and RXBar. The company is
the largest global manufacturer of cereal (about 40% of sales) and is the second-largest global
snacks company (50% of sales). Its Eggo, Morningstar, and Pop Tarts brands provide additional
breadth to its strong position in the U.S. breakfast market.
Potential for Inflection in Margins and Profit Growth
Over the past few years, the dilutive impact of acquisitions of faster-growing businesses,
reinvestment spending (especially in single-serve packaging), and sales declines in high-margin
North America cereal have caused Kellogg’s gross margin and operating margin to fall 200 and
500 bps below its food peer averages respectively. Based on our analysis, the North American
Cereal and Snacks division’s margins are now 400-500 bps below their closest peers General
Mills and Mondelez.
We expect Kellogg’s margins to improve gradually over the next few years as the dilutive factors
impacting the gross margin begin to reverse and sales growth from investment spending begins
to generate operating leverage. Specifically, we expect 40 bps of gross margin expansion in 2020 from the accretive impact of divesting Keebler assets and a 20 bp benefit from stabilizing
the North American cereal business.
Above-Peer Organic Revenue Growth
Kellogg has shifted the concentration of its portfolio more toward snacks and emerging markets
rather than breakfast cereal in developed markets. This has boosted Kellogg's organic growth
rate above 2%, which exceeds its food peers by a significant margin. Differentiated U.S. brands
like Cheez-It, Pringles, Eggo, Pop-Tarts, and Morningstar are growing at a strong rate. Cheez-It
has grown at a double-digit pace this year in the cheese cracker category by maintaining strong
product quality over competition. Pringles is up 4% behind effective "flavor stacking" advertising
campaigns and more on-the-go packaging. Pop Tarts is up double-digits this year after
launching on-the-go Pop Tart Bites.
We estimate that that the acquisitions of the fast-growing RXAR and Tolaram businesses added
over $1 billion of sales to the portfolio and the divestiture of U.S. Keebler assets (cookies/fruit
snacks/cones) subtracted $900 million. By our math, these transactions boosted the growth
profile of Kellogg’s portfolio by 130 bps.
7 January 2020
2020 Packaged Foods Preview 57
Figure 57: By Our Math, Portfolio Changes Have Boosted Kellogg’s Organic Growth
Rate by 130 bps
Source: Company data, Credit Suisse estimates, Nielsen AOCx. Used Nielsen data for 2014-2017 to calculate
growth rate for divested Keebler, fruit snacks business
North American Cereal Problems Largely Self-Inflicted
North American cereal is the glaring exception to Kellogg’s return to growth over the past two
years, down 5% year-to-date. Our view is that a good portion of the company problems in
cereal are self-inflicted. When Kellogg’s attempts in the mid 2010’s to defend its brands health
and wellness credentials failed to gain traction, it exacerbated its problems by shifting its
resources further into indulgent snacks instead. R&D spending and marketing support for cereal
declined. In comparison, General Mills has gained market share by creating effective heart-
health news for its Cheerios brand and extending it into new varieties
With consumption trends in the overall U.S. cereal category now stabilizing and Kellogg's supply
chain disruption now in the rear view mirror, we believe North American cereal has a good
chance of stabilizing in 2020. We find it encouraging to hear management recognize the
seriousness of the situation and commit to making North America Cereal a bigger priority. In our
view, brands like Frosted Flakes, Rice Krispies, Mini Wheats, and Special K still resonate with
consumers if given sufficient attention. If the cereal business merely keeps pace with the
current U.S. cereal category growth rate, it will fulfill its role in the Kellogg portfolio.
Cash Flow Conversion Will Improve
Kellogg’s free cash flow conversion ratio has trailed its peer group over the past three years.
We expect two factors driving this dynamic to improve in 2020. First, Kellogg’s capital
expenditures are likely to fade back to more normalized levels now that it has come to the end
of its investment phase in new packaging lines. Second, we expect negligible restructuring
changes now that the company has come to the end of its multi-year $1.4 billion Project K
restructuring program.
With the company’s Net Debt to EBITDA ratio now back to a very conservative level of 3.3x, we
believe the company will allocate more cash flow to share repurchases in 2020 than the $200M
it spent in 2019.
Underappreciated Emerging Market Exposure
Emerging market sales compose roughly 20% of Kellogg’s annual sales. Management views
emerging markets (specifically the AMEA region) as an important driver. Acquisitions in Nigeria,
Egypt, and South Africa have provided more scale in regions. These regions offer strong GDP
growth and a growing middle class. Management aims to reach consumers of many income
levels through a wide range of price points across cereal, snacks, noodles, and biscuits. It will
address nutrient gaps for breakfast in lower-income demographic. In Africa, Kellogg has 51%
Prior Mix
Est
Growth
Rate New Mix
Est
Growth
Rate
Kellogg Core 12,400 0.0% 12,400 0.0%
RXBAR 180 15.0%
Tolaram 900 12.0%
Divested Keebler, Fruit 900 -4.0% -
Total Kellogg 13,300 -0.3% 13,480 1.0%
Difference in Growth Rate 1.3%
7 January 2020
2020 Packaged Foods Preview 58
ownership of Multipro (a distributor), a joint venture with Tolaram (branded products seller), and
25% ownership of Dufil (branded noodles manufacturer).
Bear Case
Weak Quality of Earnings and Low Free Cash Flow
By our math, the combined impact of “ongoing” restructuring charges and non-cash actuarial
income from benefit programs “overstate” Kellogg’s EPS and understate its P/E by 11%
compared to its food peers. Kellogg’s weak pattern of free cash flow generation also suggests
weak earnings quality with free cash flow per share amounting to only 64% of its adjusted EPS
in 2018 and 76% over the past three years.
Figure 58: After Adjusting EPS Estimates for “Ongoing” Restructuring and Benefit
Accounting, We Find That Investors are Paying a Significant Premium for CPB and that
K is Trading at a Significant Premium to its Closest Peer, GIS
Source: Company data, Credit Suisse estimates; Stock prices and forward EPS estimates from FactSet as of
12/1/19.
Figure 59: Kellogg, Kraft Heinz, and Mondelez have Very Low Free Cash Flow Per Share in Relation to Their EPS; Campbell has
Very High Free Cash Flow Per Share. For SJM, the Major Difference Between FCF/Share and EPS Relates to Smucker’s Ongoing
Practice of Excluding $2.11 of Amortization Expense When it Presents Adjusted EPS in its Results
Source: Company data, Credit Suisse estimates. Kellogg and Kraft Heinz’s free cash flow includes collections from securitized trade receivables 2016-2018 before their
accounting restatements
Cal 20
P/E
Adj Cal 20
P/E
Change in P/E
after EPS
Adjustment
CPB 17.9 CPB 20.3 14%
K 16.3 K 18.1 11%
CAG 13.0 CAG 14.4 11%
KHC 11.9 KHC 13.2 10%
MDLZ 19.9 MDLZ 20.8 4%
SJM 13.0 GIS 15.7 1%
GIS 15.6 SJM 13.0 0%
MKC 30.1 MKC 29.9 -1%
HSY 24.2 HSY 23.9 -1%
Avg 18.0 Avg 18.8 5%
Company EPS 3 Yr FCF/Share 3 Yr
FCF per Share/Adj. EPS 3
Year EPS 1 Yr
FCF/Share 1
Yr
FCF per
Share/Adj. EPS 1
Year
CPB 8.52$ 9.43$ 111% 2.61$ 3.35$ 129%
GIS 9.41$ 10.27$ 109% 3.22$ 3.75$ 116%
HSY 14.38$ 9.19$ 64% 5.36$ 6.05$ 113%
MKC 13.02$ 13.79$ 106% 4.98$ 4.90$ 99%
CAG 5.86$ 5.79$ 99% 2.01$ 1.90$ 94%
SJM 23.97$ 22.19$ 93% 8.29$ 6.85$ 83%
MDLZ 6.41$ 3.98$ 62% 2.43$ 1.92$ 79%
KHC 10.32$ 5.15$ 50% 3.52$ 2.50$ 71%
K 12.07$ 9.19$ 76% 4.33$ 2.75$ 64%
7 January 2020
2020 Packaged Foods Preview 59
Management Track Record
The company’s long list of execution missteps and bad choices over the past several years have
led to significant underperformance of the stock, declining returns on capital and some loss of
confidence among investors. The company has missed its financial targets for executive
compensation in five of the past seven years. Investors who were long Kellogg in 2018 still feel
bruised by the suddenness of its forecast reduction in 3Q, (which revised down operating profit
by 6%) and the dilutive impact of the Keebler divestiture.
Kellogg’s North American Cereal sales may not stabilize as quickly as we expect.
Recent signs of stabilization in the North American cereal category may turn out to be overly
optimistic. Consumers have been exiting the cereal category because they are shifting to higher
protein diets and they view cereal as too sugary, carb-heavy and gluten-heavy to be considered
a healthy meal. Kellogg’s cereal business has high exposure to the health and wellness
segment of the category (about 44% of sales) which has felt the most negative impact from this
shift in dietary preferences.
Management has yet to lay out a compelling strategy or the investment necessary to defend its
health and wellness credentials, particularly for struggling brands like Special K, Kashi, and Mini
Wheats. If Kellogg introduces overly aggressive price promotions to regain market share rather
than innovative products and ideas, it will have a dilutive impact on Kellogg’s margin structure.
We believe consensus estimates for 2020 EPS are too high.
In our estimates, we have taken into account the full impact of dilution from the Keebler
divestiture and the likelihood that Kellogg will reinvest the benefit of its 53rd week back into the
business. We believe consensus has underestimated the impact of these factors. However, we
think the market will pay more attention to fundamental organic revenue growth and organic
operating income growth as opposed to EPS when management provides guidance for 2020.
We expect organic operating income growth to accelerate to 3-4% in 2020 compared to flat in
2019. We are above consensus for 2021.
7 January 2020
2020 Packaged Foods Preview 60
Figure 60: Ready-to-Eat Cereal Sales Have Declined at the Same Pace as Cigarette
Sales over the Past Four Years in Terms of Volume Consumption
Source: Nielsen, xAOC through 2018, Credit Suisse estimates
88
90
92
94
96
98
100
102
2013 2014 2015 2016 2017 2018
RTE CEREAL CIGARETTES
RTE CerealCAGR: -2.4%Cigarettes CAGR: -2.4%
7 January 2020
2020 Packaged Foods Preview 61
Figure 61: We Estimate That 42% of Kellogg’s Portfolio Is Structurally Challenged ($M)
Source: Nielsen xAOC+C, Credit Suisse estimates
Kraft Heinz (Underperform, $27 Target Price)
Valuation
Our $27 target price assumes a 10.5x EV/EBITDA multiple against our 2020 estimate. Even if
the company stabilizes EBITDA, we think the stock will trade at a ~11% discount to its peers
due to its challenged portfolio and inconsistent track record. Sales growth without additional
investments represents the upside risk to our price target.
Good 2015 2016 2017 2018
Last 52-
Weeks
% of
Total
Sales
3-Yr
CAGR
1-Yr
Growth
Cheez-it 943 991 1,008 1,042 1,185 14% 6% 14%
Pringles 808 821 782 831 859 10% 2% 4%
Pop-Tarts 760 766 738 736 815 10% 2% 11%
Eggo 746 721 749 797 800 10% 4% 1%
Rice Krispie Treats 285 282 292 323 362 4% 9% 12%
Morningstar Farms 286 262 281 305 321 4% 7% 5%
RXBAR 0 4 46 132 142 2% 218% 11%
Bear Naked 73 65 77 79 79 1% 7% 0%
Subtotal 3,900 3,913 3,973 4,244 4,563 55% 5% 8%
Stable 2015 2016 2017 2018
Last 52-
Weeks
% of
Total
Sales
3-Yr
CAGR
1-Yr
Growth
Keebler Club 237 243 255 255 256 3% 2% 0%
Subtotal 237 243 255 255 256 3% 2% 0%
Challenged 2015 2016 2017 2018
Last 52-
Weeks
% of
Total
Sales
3-Yr
CAGR
1-Yr
Growth
Kellogg RTE Cereal 2,619 2,585 2,452 2,393 2,327 28% -3% -3%
Kashi 309 260 232 206 186 2% -10% -10%
Nutri-Grain 225 219 202 190 194 2% -4% 3%
Keebler Townhouse 220 217 198 185 164 2% -9% -13%
Other Keebler 193 189 169 168 170 2% -4% 2%
Austin 131 122 114 105 101 1% -6% -3%
Other (mostly Special K bars and shakes) 567 424 329 279 214 3% -20% -26%
Special K Pastry Crisps 84 74 54 58 51 1% -12% -12%
Keebler Zesta 57 52 48 46 43 1% -6% -7%
Special K Nourish 19 34 21 22 9 0% -37% -37%
Subtotal 4,423 4,176 3,818 3,652 3,459 42% -6% -6%
Total Company Sales 8,560 8,331 8,046 8,152 8,278 101% 0% 2%
7 January 2020
2020 Packaged Foods Preview 62
Bull-Case
Leading Brands
Kraft Heinz has a portfolio of well-known brands with number-one or -two positions in 17 of its
largest categories, representing roughly 80% of sales. These include the Kraft brand, Oscar
Mayer, Maxwell House, Jell-O, and Planters. Heinz has products with number-one or -two
shares in more than 50 countries, including the Heinz brand of ketchup (number one in the U.S.
and globally), Ore Ida (number one in U.S. frozen potatoes), ABC (number two in Indonesian
soy sauce), and Quero (number one in Brazilian frozen vegetables).
2019 Might Signify the Bottom for Margins
After a weak 1H of 2019 and a humbling 2018, EBITDA margins have revised 600 bps lower
from their 2017 peak. To some, this might signify a defensible base for earnings and margins
from which the company can start its “Path to Normalization.” New CEO Patricio seemed to
indicate on the last earnings conference call that the business may not necessarily need another
round of incremental investment to pivot to growth. Instead, Patricio wants to emphasize
allocating SG&A expenses more effectively and developing a stronger process for ongoing
productivity in the supply chain. But from our perspective, Kraft Heinz’s EBITDA margin of 24%
is still quite high in relation to its peers at 21% on average. For context, Kraft and Heinz
businesses operated at an average EBITDA margin of only 19% prior to 3G acquiring and
merging them.
Figure 62: KHC EBITDA Margin is Still High Compared to Peers
Source: Company data, Credit Suisse
Highly Experienced Investors Own the Stock
Bulls on this stock believe that the “all-star cast” of investors who control this company (3G,
Berkshire) are clever enough to figure out a way to recoup their losses on this investment in the
fullness of time. For example, Berkshire and 3G may decide to make an equity infusion in the
business, issue preferred stock, or issue convertible bonds to assuage the concerns of the debt
rating agencies.
25%
24%
22% 22%21% 21%
20%
19%
18%
17%
15%
17%
19%
21%
23%
25%
27%
HSY KHC SJM MKC CPB GIS MDLZ CAG BGS K
7 January 2020
2020 Packaged Foods Preview 63
Bear Case
Seriousness of Balance Sheet and Potential Bond Downgrade
We continue to view a dividend cut as likely outcome when the company finishes its strategic
review in early 2020. S&P Global Ratings wrote on October 31 that Kraft Heinz will need to
take “near term actions” to reduce its debt-EBITDA leverage to 4.0x by mid-2021 and avoid a
ratings downgrade. EBITDA has shown signs of stabilization at $6.0 billion, but we expect the
impact of divestitures and a reset in incentive compensation to send EBITDA to $5.8 billion and
increase the leverage to 4.8x by the end of 2020. The company is currently barely generating
enough cash flow to pay its dividend. As a result, we don’t think management has any other
viable options if intends to make good on its commitment to maintaining its investment grade
rating.
Some investors believe that the company will sell premium assets to accelerate debt reduction.
However, S&P wrote that it would not look favorably on a capital structure plan that relies solely
on future asset sales that have limited visibility and execution risk. As a result, we don’t expect
the company to announce a major divestiture when it unveils its strategic plan
Figure 63: 2020 EBITDA and EPS Bridge
Source: Company data, Credit Suisse estimates
Earnings Quality Is Among the Worst in the Group
By our math, the combined impact of “ongoing” restructuring charges and non-cash actuarial
income from benefit programs “overstate” Kraft Heinz’s EPS and understate its P/E by 11%
compared to its food peers. This is partly because the company is currently including a $300M
per year benefit from amortizing gains related to the discontinuation of a corporate health care
plan. However, the amortization benefit will sharply decline from $306M in FY19 to $122M in
FY20 and to $8M in FY21.
Over the past three years, Kraft Heinz has taken the most restructuring and impairment charges
in the food group as a percentage of its adjusted EPS.
EBITDA
Pre-Tax
Income Impact EPS/Impact
2019 6,062 $2.82
Incentive Comp Reset (100) ($0.07)
Divestitures & Business Exits
(Canada and McCafe )(100) ($0.07)
Business Reinvestment (83) ($0.05)
Other Expenses (Income) (165) ($0.11)
Interest Expense (43) ($0.03)
Higher Tax Rate ($0.04)
2020 5,779 $2.45
7 January 2020
2020 Packaged Foods Preview 64
Figure 64: Cumulative Past Three Years Restructuring and Impairment Charges as % of Adjusted EPS
Source: Company data, Credit Suisse estimates; Restructuring charges include: restructuring, impairment, and integration charges
3G Companies Are Not Designed to Pivot to Growth
As with most of the consumer companies in its portfolio (e.g. Burger King, Budweiser), the
private equity firm 3G put Kraft and Heinz together in 2016 with the idea that it could operate
the business at a much lower cost than food peers while maintaining the brands. Through a
strict Zero-Based Budgeting process, 3G companies boost margins through dramatic cuts to
overhead costs and supply chain consolidation.
But in the case of Kraft Heinz, the cuts carved into the muscle of the organization and starved
the brands of investment. The antiquated Kraft Heinz brands proved unable to keep up with
consumers’ growing preference for more entrepreneurial, natural brands. Retailers like Walmart
and Kroger, which had been investing in e-commerce to compete against Amazon, reacted
negatively to the company’s approach and reduced the brands’ shelf space in favor of private
label. Board member Jorge Lehmann said publicly that the massive changes in technology and
consumer preferences in the industry made him feel like a "scared dinosaur.”
Kraft’s new CEO Miguel Patricio now has the unenviable task of transforming a company that
was envisioned as a cost-cutter into a company that can generate organic growth. Even if he
gets permission from the board to increase investment spending behind the brands to do it, the
progress undoubtedly will be slow. About 44% of Kraft Heinz’s U.S. retail portfolio competes in
commoditized categories (like cheese, meats, coffee, and nuts) where the company has been
losing share to private label or more on-trend brands. Management says that insufficient training
in personnel and process at the manufacturing facilities has caused “double-digit” losses in the
supply chain in the last few years.
Big Impairment Charges Reflect Reduced Outlook
The company announced $15.9 billion of impairment charges in February and May (primarily on
the Kraft and Oscar Mayer brands) and then another $1.2 billion in its first half results in the
international businesses and in U.S. Refrigerated. We view this as recognition that the
company’s cash flow generation will be significantly below what it originally anticipated pre-
merger even if the turnaround efforts succeed. Additionally, The CFO stated in August that
there is an ongoing risk of future impairments given “any change in forecast or modeling
assumptions that can trigger” it. In our view, this comment raised the possibility that the
company might decide to rebase its EBITDA even lower in 2020 due to incremental investment
needs rather than “self-fund” the investment with internal savings.
120.9%
55.4%
25.9% 22.0% 21.2%
17.3% 13.3% 11.2%
4.2%
KHC CPB SJM CAG MDLZ K HSY GIS MKC
7 January 2020
2020 Packaged Foods Preview 65
Figure 65: Over 30% of Kraft Heinz’s Global Sales Are Exposed
to Commodity Cheese and Meats
Figure 66: Over 50% of Kraft Heinz’s U.S. Retail Sales ($21B)
Are Exposed to Commodity Cheese, Meats, Nuts, and Coffee
Source: Company data, Credit Suisse. 10-K Source: Company data, Credit Suisse estimates
Condiments and sauces
25%
Cheese and dairy
21%
Ambient meals
9%
Frozen and chilled meals
10%
Meats and seafood
10%
Other25%
Regular Cheese18%
Sliced meat11%
Lunchables7%
Dry dinners 7%
Nuts and seeds6%
Cream cheese
6%
Bacon5%
Juices4%Ground coffee
4%
Frozen potatoes3%
Beverage enhancers
3%
Mayonaisse3%
Condiments3%
Single serve coffee
2%
Frozen meals and apetizers
4%
Salad dressing 2%
Other 15%
7 January 2020
2020 Packaged Foods Preview 66
Figure 67: We Estimate That Roughly 53% of Kraft Heinz’s Portfolio Is Structurally Challenged ($M)
Source: Company data, Credit Suisse estimates. Nielsen xAOC+C
Good 2015 2016 2017 2018 L52 Wks
% of Total
2019 Sales 3-Yr CAGR
L52 Wks
Growth
Lunchables 1,252 1,314 1,352 1,336 1,343 6% 1% 1%
Philadelphia 981 1,045 1,085 1,154 1,216 6% 5% 6%
Heinz 848 890 910 959 992 5% 4% 4%
Kraft Mac & Cheese 763 746 748 787 808 4% 3% -1%
Cracker Barrel 247 300 313 317 315 2% 2% -1%
Mc Café 182 220 278 295 291 1% 10% -2%
Classico 241 242 256 264 268 1% 3% 2%
T.G.I. Friday's 209 210 221 237 250 1% 6% 7%
Claussen 178 178 179 194 203 1% 4% 5%
Bagel Bites 148 146 152 160 162 1% 3% 1%
Devour - 24 52 73 93 0% 58% 32%
Subtotal 5,048 5,317 5,546 5,775 5,941 28% 4% 3%
Stable 2015 2016 2017 2018 L52 Wks
% of Total
2019 Sales 3-Yr CAGR
L52 Wks
Growth
Other Brands 2,790 2,674 2,547 2,595 2,683 13% 0% 4%
Jell-O 578 563 559 553 572 3% 1% 4%
Crystal Light 299 286 285 295 303 1% 2% 3%
A.1. 156 156 152 158 164 1% 2% 5%
Stove Top 145 141 141 144 143 1% 0% -2%
Subtotal 3,968 3,820 3,683 3,745 3,865 19% 0% -67%
Challenged 2015 2016 2017 2018 L52 Wks
% of Total
2019 Sales 3-Yr CAGR
L52 Wks
Growth
Oscar Mayer 3,583 3,376 3,265 3,280 3,241 16% -1% -1%
Kraft Cheese 2,623 2,576 2,498 2,388 2,276 11% -4% -5%
Velveeta 1,185 1,179 1,155 1,113 1,089 5% -3% -3%
Planters 1,384 1,332 1,226 1,060 1,066 5% -7% 0%
Maxwell House 890 837 793 749 669 3% -7% -11%
Ore-Ida 662 647 647 602 609 3% -2% 1%
Kool-Aid 580 568 529 530 548 3% -1% 4%
Capri Sun 586 538 505 482 483 2% -4% 0%
Miracle Whip 328 325 303 288 283 1% -5% -2%
Smart Ones 442 349 286 233 216 1% -15% -8%
Cool Whip 235 234 223 212 214 1% -3% 0%
Breakstone's 226 224 217 207 195 1% -5% -6%
Gevalia 241 225 204 195 188 1% -6% -3%
Subtotal 12,966 12,410 11,850 11,337 11,078 53% -4% -2%
Total 21,982 21,547 21,080 20,857 20,884 100% -2% 0.1%
7 January 2020
2020 Packaged Foods Preview 67
Figure 68: Proceeds from Divestures Helped Reduced Net Debt by $1.875B, But This
Might Not Be Sufficient To Avoid a Debt Downgrade or Dividend Cut
Source: Company data, Credit Suisse estimate
McCormick (Neutral Rating, $160 Target Price)
Valuation
Our $160 target price assumes a 26.0x P/E multiple against our 12-month forward EPS
estimate. This is in-line with other consumer staples that have leadership positions in attractive
niche markets, such as Clorox and Church and Dwight. Accelerated market share losses to
private label pose the largest threat to our thesis.
Bull Case
Scarcity of “Growth” Consumer Staples Justify Premium Valuation
Valuation multiples of high-quality mid-cap staple companies with strong growth rates have
expanded, while multiples for slow-growth and competitively challenged big food companies
have compressed. We think this reflects investors’ desire for safe haven names to protect from
an economic slowdown and recognition that there are fewer legitimate growth stories within the
traditional staples sector. McCormick, Church & Dwight, Clorox, and Hormel stocks have all
enjoyed significant multiple expansion because they have defensible market shares in niche
categories and legitimate 3-4% organic growth rates due to ongoing productivity and
reinvestment.
$28,200
$29,907 $30,038
$27,937
$27,499
$26,000
$26,500
$27,000
$27,500
$28,000
$28,500
$29,000
$29,500
$30,000
$30,500
2016 2017 2018 2019 2020E
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2020 Packaged Foods Preview 68
Figure 69: The Highly Valued Mid-Cap Consumer Staple Stocks Are Few and Far
Between
Source: FactSet, Credit Suisse estimates. Big Food average includes CAG, CPB, GIS, HSY, K, KHC, MDLZ,
MKC, SJM. Data as of 01/02/19
Relatively Unaffected by U.S. Private Label Expansion
McCormick’s branded spice and seasonings business continues to grow despite losing share to
private label. Retailers that expanded private label in 2018 made room for it by discontinuing
third-tier regional brands rather than removing McCormick. By 2019, McCormick’s brands
generally held share and private label’s share stagnated. We believe that McCormick’s category
management capabilities, strong new products, and private label manufacturing flexibility provide
a high degree of insulation from the private label threat.
On-Trend Category with Positive Demographic Tailwinds
While the vast majority of packaged foods companies have felt the pressure of shifting
demographics and changing dietary preferences, the spice and seasonings category remains a
structural growth story, with consumption up another 4% in 2019. Millennials’ interest in exotic
foods with bolder flavors continues to grow, as does the focus on healthy eating. Consumers
are looking for ways to reduce their intake of sugar and artificial ingredients.
The company's portfolio is well positioned to cater to the strong demand for flavoring, led by a
McCormick brand that over-indexes with Millennials. With a 35% share of the U.S. spice and
seasonings category and 10x the size of the next branded competitor, McCormick enjoys
category leadership and pricing power like no other company in our coverage. The $4.2 billion
RB Foods acquisition extends its breadth by making it the #2 branded player in the highly
fragmented condiments category, up from #10 at retail. Before that, it had only $110M
(approximately) in sales with McCormick Grill Mates, Lawry's, and Stubb's products. As a result
of these competitive advantages, its organic growth rate of 3% over the years has far exceeded
packaged foods peers.
RB Foods Bolstered McCormick’s Leadership in Flavors and Provided Synergies
While RB Foods performed well over the past 10 years at a growth rate of 5%, its owner,
Reckitt Benckiser, treated it as a noncore business and did not give it resources to expand
internationally or fully exploit opportunities for growth domestically. In contrast, McCormick is
treating the Frank’s and French’s brands as a big priority and providing them with substantial
resources for growth. In the U.S, the Consumer team filled distribution gaps on Frank’s Redhot
and extended the brand to new categories. For French’s mustard, McCormick utilized the same
strategy it successfully employed in herbs and spices to help retailers increase the profit pool by
raising prices of private label and value brands.
In U.S. foodservice, the acquisition has transformed the company from a back-of-the-house
ingredient supplier to a higher-value, front-of-the-house player. It has an excellent opportunity to
put more of its high-value brands (such as Old Bay and Lawry's) on the table. According to
NTM P/E 19-Jan Current
McCormick 23.3 29.9
Clorox 22.5 24.2
Church & Dwight 25.7 26
Hormel 22.7 25.1
Average 23.6 26.3
Overall Big Food Average 14.3 16.8
7 January 2020
2020 Packaged Foods Preview 69
management, the complementary nature of the acquisition boosted foodservice’s points of
distribution by over 19,000 new restaurant locations.
Strong E-commerce Operations
McCormick is frequently recognized by its peers in the industry as a leader in e-commerce.
Management took the view early on that it needed to allocate resources disproportionately to
Amazon and other e-retailers to capitalize on the growth in the channel. Its e-commerce sales
are growing over 31% to pure-play customers while U.S. omni-channel digital sales have grown
roughly 94%. The electronic media consulting firm L2 gives McCormick high praise for its digital
marketing efforts, ranking it first out of 126 food brands in terms of digital marketing
effectiveness.
We think McCormick is particularly well positioned to capitalize on e-commerce because
consumers so frequently search the internet when looking for new recipe ideas and because its
small-sized, high-price products fit so well as an add-on to full-basket shopping occasions or
recipe-driven searches.
Underappreciated Industrial Division
The large improvements in the company's Industrial division (39% of profits) have been a major
contributor to the company's profit growth. Of this division's sales, half go to food service
distributors and half to food processors. Its customers include 9 of the top 10 food processors
and all of the top 10 foodservice distributors and restaurant chains.
We expect this division to continue to capitalize on favorable underlying growth trends. Food
processors have been developing new formulations and new products to improve their health
and wellness credentials. Customers in emerging markets (especially China) have been
investing for growth again and seeking more value-added solutions. The acquisitions of Giotti
and Brand Aromatics have provided a high degree of revenue synergies by (1) helping
customers in processed foods add flavor to “natural” products (especially in poultry and
processed meat) and (2) enabling McCormick to attain access to more value-added business in
Europe.
Figure 70: Industrial Margins Have Expanded ~110 bps per Year Since 2013, While
Organic Growth Has Averaged 3.6%
Source: Company data, Credit Suisse estimates
7.5%
8.3%
9.5%10.0%
11.9%
14.2% 14.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2013 2014 2015 2016 2017 2018 2019E
-
50.0
100.0
150.0
200.0
250.0
300.0
350.0
EBIT EBIT Margin Organic Sales
EBIT ($M)
7 January 2020
2020 Packaged Foods Preview 70
M&A Activity Is Likely to Re-Accelerate
After paying down debt from the 2016 RB acquisition, McCormick’s financial leverage is back
down to 3.3x and management says that the company is prepared to get back to its normal
pace of M&A. The company has a long and successful track record with 9 of the 11 deals
meeting or exceeding synergy expectations by our calculations. Management defines
acquisitions as an important part of the company’s algorithm for growth, representing 2% per
year to sales on average. As in the past, we believe that the company will target small flavoring
companies that increase the capabilities of its Industrial division to provide organic and natural
solutions for customers. Dupont and IFF’s recent merger announcement may increase
McCormick’s sense of urgency in that regard.
Bear Case
Stock Looks Over-Valued, Especially In Relation to Rising IT Investments
The stock is now fetching a significantly higher valuation multiple than its packaged food peers’
average because the market implicitly expects the company to consistently deliver its sales and
EPS growth targets. But in fiscal 2020, the company’s EPS growth rate will feel a negative
impact from investments to replace existing, disparate ERP systems with SAP HANA.
According to management, the total cost of the ERP investment is to range between $150 to
$200 million over the three years starting in 2019, with approximately 60% in capital spending
and 40% in operating expense. We think this entails incremental operating expenses of $10-
$20 million in FY 20 (about $0.06-$0.12/share) in FY 20 depending on how the company
spreads the investment. The company’s current SAP platform won’t be decommissioned until
2025, but McCormick management wanted to speed up the process.
Private Label Share Gains May Erode McCormick’s Growth over Time
While McCormick’s pricing power stands out within its group, the company is not immune to
private label expansion. When private label gains momentum at a pace this rapid (market share
up 470 bps versus 2017), retailers have more leverage over their vendors in category
management discussions. Some of the private label sales growth is optical in nature (as a result
of Sam’s Club buying Tone’s brand from B&G with a reclassification to private label), but further
share losses could prompt investors to reduce faith in McCormick’s brand equity.
Inventory Reductions at Retail May Resurface
In 4Q18 (the company’s most important quarter of the year), the company missed its sales and
EPS estimates by a significant degree because a handful of big retailers mysteriously reduced
inventory on McCormick’s seasonal spice and seasoning products heading into the holiday
season. McCormick said that some of these reductions related to “ordering glitches” at one
specific retailer.
The company’s sales trends quickly returned to normal in 1Q19 and we don’t see any reason to
believe that another inventory de-load is coming in 4Q19. However, generally speaking, we
view McCormick’s spice and seasonings business as more vulnerable to inventory de-loading
than its food peers because its products have intrinsically lower “turn rates.” To that end,
management says that it assumes a 1% headwind to sales in its annual forecasts for the sake
of conservativism in case inventory de-loading reoccurs.
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Figure 71: We Estimate 17% of McCormick’s Brands Are Challenged ($M)
Source: Nielsen xAOC+C, Credit Suisse estimates
Good 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of
Total
Sales
3-Yr
CAGR
1-Yr
Growth
MKC Herbs & Spices 350 357 358 356 353 356 12% -0.4% -0.9%
Lawry's 201 209 216 219 223 218 7% 2.2% 2.2%
MKC Extracts 127 134 149 169 181 164 6% 10.4% 10.0%
MKC Gravy 130 133 137 148 152 147 5% 4.5% 3.1%
Frank's Redhot 119 133 139 151 171 149 6% 8.8% 14.3%
MKC Latino 90 96 100 113 119 112 4% 7.5% 6.6%
MKC Chili Sauce 63 63 62 70 73 70 2% 5.4% 5.0%
Gourmet Garden 41 52 63 70 73 70 2% 12.0% 4.3%
Kitchen Basics 60 62 63 69 69 69 2% 3.5% 0.0%
Thai Kitchen 48 55 58 60 61 60 2% 3.9% 2.3%
MKC Salt 40 42 45 49 52 49 2% 7.0% 5.9%
Stubb's 45 41 40 42 45 42 1% 2.5% 5.8%
Old Bay 35 39 39 41 46 40 2% 6.1% 13.9%
MKC Mayo 28 28 29 33 37 32 1% 10.1% 14.7%
MKC Onion 27 27 27 28 29 27 1% 3.5% 7.3%
Simply Asia 17 14 13 17 17 17 1% 6.9% -1.2%
Subtotal 1,422 1,484 1,538 1,635 1,701 1,624 57% 4.7% 4.7%
Stable 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of
Total
Sales
3-Yr
CAGR
1-Yr
Growth
Other MKC Brand 201 209 212 205 202 205 7% -1.1% -1.6%
MKC Seasonings 207 213 211 213 219 213 7% 1.0% 2.8%
MKC Peppercorn 145 159 151 144 144 144 5% -3.1% 0.6%
MKC Hot Peppers 58 60 59 58 58 58 2% -1.2% 0.9%
MKC Garlic 53 54 56 57 58 57 2% 2.2% 1.2%
Subtotal 664 694 690 677 681 677 23% -0.6% 0.7%
Challenged 2015 2016 2017 2018
Last 52-
Weeks
Last 52-
Weeks
YA
% of
Total
Sales
3-Yr
CAGR
1-Yr
Growth
French's 282 277 269 264 255 266 9% -2.7% -3.9%
Zatarain's 219 218 204 200 210 200 7% -1.1% 5.5%
El Guapo 41 37 35 37 38 36 1% 0.2% 3.4%
5th Season 55 48 30 0 0 0 0% -97.3% -98.3%
Cattlemen's 7 6 5 5 5 5 0% -5.3% -1.6%
Subtotal 603 586 544 506 508 507 17% -4.6% 0.3%
Total Company 2,826 2,892 2,893 2,935 3,001 2,924 100% 1.2% 2.6%
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2020 Packaged Foods Preview 72
Mondelez (Outperform Rating, $60 Target Price)
Valuation
Our 12-month $60 target price reflects a 21.5 P/E multiple on our forward EPS estimate.
Volatile conditions in emerging markets pose the largest risk to our estimates and target price.
Bull Case
Broad International Footprint with Great Brands
The global snacks category is growing at a stronger pace than that of broader food. Time
compression leads to more snacking occasions during the day and fewer formal meals. Per
capita consumption of western snack brands grows rapidly in emerging markets as GDP rises
and consumers shift to premium brands.
With roughly 70% of its sales in international markets and 40% in developing markets,
Mondelez appears well positioned to capitalize on economic growth abroad. Its portfolio of big
global brands includes Oreo, Cadbury, Milka, LU, Stride, and Trident and provides many
opportunities to expand into “white spaces” such as chewing gum and chocolate in China,
chocolate bars in the United States, and “choco-bakery” in Europe. Consumption trends for
CPG in China have accelerated behind growing GDP in second-tier cities. The company notes
its newly launched products in India are attracting incremental sales. Importantly, Mondelez’s
West European business has returned to positive growth behind effective advertising and trade
support in the UK and a distribution recovery in Germany.
“Local First” Strategy is On-Track
After years of focus on cost controls that starved the brands, CEO Dirk van de Put has
successfully shifted the focus of the company back to topline growth and gross profit “dollars”
instead of margins. The new “Local First” approach decentralizes decision-making and gives
country business managers more authority and resources. Regional leaders now have
permission to put more focus on the local jewels in their portfolios rather than just the global
brands. Investments in local route-to-market distribution and supply chain flexibility give them
the ability to expand the reach of the brands to a broader set of consumers in emerging markets.
India, for example, can put more focus on 5c single-serve products rather than $2 Cadbury
chocolate bars. The AMEA region in general will increases its points of distribution by 35% to 5
million.
In addition, management rearranged its compensation structure, which now gives more rewards
(and penalties) for managerial performances all the way down to the country level. We believe
this is a positive for the company as it encourages more accountability.
With this new strategy, Monelez’ organic growth rate has accelerated from 1.0% in 2017 to
3.5%+ in 2019 and is well on its way to 4-5% in our view. We believe the valuation multiple will
re-rate 2-3 turns higher as the higher growth rate puts the stock in the league of high quality,
multi-national peers like Pepsico, Nestle, and Unilever.
Improved Margin Structure Appears Sustainable at 17%
Mondelez improved margins by 380 bps over the past four years owing to decreased overheads,
the opening of new state-of-the art facilities while reducing the number of plants by more than
20%, a reduction in its suppler base to less than 30,000 from 100,000, and a 70% reduction
in SKU count. It aims to drive further cost savings through the use of digital tools and
consolidation of IT applications (to improve supply chain efficiency and transportation costs).
These measures are expected to produce incremental gross profit with a portion of it reaching
the bottom line, while the rest will be used for funding advertising and investment.
Joint Ventures Provide ‘Financial Flexibility’
Management recently reiterated its confidence in the joint ventures Mondelez has had in place
since its coffee business combination with D.E. Master Blenders (in 2015) and the company’s
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2020 Packaged Foods Preview 73
investment in Keurig Dr. Pepper (KDP). Importantly, management also recently indicated that
these ventures provide ‘financial flexibility.’ We think this means management will monetize
these shares at some point to either finance an accretive acquisition or accelerate share
repurchase. By our estimate of the value of these JVs, the use of proceeds would generate
roughly 6% EPS accretion.
Bear Case
Reinvestment Needs May Continue Through FY20
Management has stated in the past that it plans to reinvest half of its gross profit dollar growth
as a way to spur volume growth to boost the company’s operating leverage (and the other half
drops to the bottom line). However, this is an increasingly competitive market that requires a
higher cost to expand. As a result, it is possible that Mondelez will need to reinvest at a similar
level in FY19. If this is the case, EPS would grow at a mid-single-digit rate, as opposed to a
high single-digit rate.
Shift in Strategy Adds Risk
The shift in strategy might encourage a re-proliferation of SKUs and suppliers that the company
has worked so hard to consolidate over the past five years. If it launches many new products
that consumers simply do not like or extends too far into channels with insufficient demand,
then the company will have a bigger hole to dig itself out of. However, given the size and growth
of the snacking category, we view this as a risk worth taking.
North America Supply Chain Is Still Antiquated
While management recently noted that it is updating the capital and technology in North
America’s antiquated manufacturing facilities, the improvements will take a long time to roll out.
Roughly 40% of its volume is still made on lines that do not provide full reliability. Lack of a
labor contract with the unions in the U.S. has been a significant obstacle to investing in the
footprint and modernizing the lines because the company cannot make improvements until it has
agreements with the unions on the headcount impact. We believe that management and labor
will negotiate a solution that will enable further supply chain restructuring within the timeframe of
the company’s 2022 “Simplify” restructuring plan.
Consumption Rates in Indulgent Categories Could Decline
As consumers increasingly search for healthier snack options, Mondelez’s brands remain
susceptible to the growing backlash against sugar-filled food. We cannot deny that the category
has slowed, with candy currently growing 1-2% versus 3-4% historically while convenience and
drug stores continue to push initiatives to replace candy with healthier snacking options. Our
view is that these categories will hold up surprisingly well because consumers view them as a
relatively small treat in their daily diet (as opposed to a full meal) that provides too much intrinsic
enjoyment to sacrifice. However, a continued transition toward healthier foods remain a
structural risk for the company. Given the sensitivity of the company’s valuation multiple to its
topline growth rate, there is material downside if the company’s growth rate re-rates lower.
Broad International Exposure Could Turn Into a Risk
The global economy is not as safe as it once was. The rise in country nationalism and trade
disputes could present a headwind to a business that derives 70% of its sales from outside the
U.S.
Nomad Foods (Outperform Rating, $26 Target Price)
Valuation
Our $26 price target is based on 11.6x against our forward EBITDA estimate, which is in-line
with U.S. food peers. We expect the multiple to expand assuming the company consummates
an attractive acquisition and as Brexit fears subside. Brexit volatility and pushback from EU
retailers represent the biggest risks to our target price.
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2020 Packaged Foods Preview 74
Bull Case
On-Trend Category Leadership
Nomad Foods’ brands compose 14% of frozen food market share on average in Western
European markets, well ahead of branded peers and only second to private label (at roughly
50% share). The company leads advertising spending in its categories on the local level, and its
resurgent volume growth and innovation initiatives position its brands favorably with large
customers such as Tesco and Carrefour. The company’s brand equity and product quality
enable higher price points and corresponding margin-accretive sales for retailers (as compared
to shelf-stable products or private label frozen brands). Sharing best-practices across its
company regionally has created efficiencies in procurement, manufacturing, consumer
marketing, and retailer relationships. We expect Nomad to benefit as shelf space consolidation
toward a two-tier system occurs in the frozen category.
Consistent Organic Sales Growth
We expect organic growth to accelerate to 2.6% in 2020 from 2.0% in 2019 through balanced
pricing and volume growth as the company expands into on-trend ready-meal offerings and
plant-based innovation. This includes the roll-out of its new Veggie Bowls line under the Iglo
brand into five European markets and the launch of Green Cuisine plant-based protein
substitutes in the UK. We have been positively surprised by management’s ability to raise prices
to offset commodity inflation in 2019 with minimal elasticity of demand.
Brexit Fears Overblown
Nomad derives revenues from a variety of European countries including the U.K. (roughly 28%
of sales), Italy (roughly 20% of sales), Germany (roughly 15% of sales), and Sweden (roughly
11% of sales). By our math, a “hard Brexit” with a 20% tariff on imported goods would
represent €30-35 million of higher costs for Nomad, primarily on frozen fish sold in the U.K.
However, a temporary tariff regime published by the U.K. government back in march intends to
give Nomad and other U.K. companies up to 12-months of tariff-free access on their imports in
the event of a “hard Brexit” transition. We think investors underestimate the flexibility this plan
would provide Nomad to either raise prices to offset higher costs or adjust its supply chain to
domestic sourcing. Management has said in the past that it also has the capabilities to fully shift
its manufacturing processes from the EU to the U.K. (and vice versa) to avoid additional costs in
the future.
Potential for Accretive M&A Deal
Chairman of the Board Martin Franklin founded Nomad with the intention of using it as a
platform for acquisitions in the highly fragmented European frozen foods category. As
demonstrated by the value he created for shareholders of Jarden Corporation (which he
eventually sold to Newell), Franklin brings very strong M&A acumen to the boardroom. The
acquisitions of Goodfellas, Iglo, and Aunt Bessie over the past few years all met or exceeded
internal expectations.
Nomad believes there are several candidates in the European frozen foods landscape that
would fit under Nomad’s umbrella. Nomad’s equity offering in 1Q19 and its strong cash flow
have put €750 million of cash on the balance sheet to fuel another acquisition. By our math, a
big transaction like Nestle’s €900M European frozen pizza business would generate as much as
€0.40 of EPS accretion including synergies.
Bear Case
Commodity Cost Exposure
For inputs, Nomad’s product portfolio is heavily dependent on volatile inputs like fish
(composing 40% of sales) and vegetables (composing 30% of sales including meals). It
sources fish through annual contracts from major suppliers and sources peas and spinach
directly from farmers with long-running relationships.
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2020 Packaged Foods Preview 75
Collective Purchasing Agreements
European retailers have created purchasing alliances that the manufacturer has to negotiate
with in order to open the door to negotiations at the local level. Retailers in France and Germany
have used these to their advantage for years. Such alliances tend to give the retailers more
leverage to demand favorable trade promotion terms. Nestle recently had trouble with the
Agecore alliance that hurt its sales for a few months until it eventually came to terms. The
recent alliance between Tesco and Carrefour and the consolidation of Asda and Sainsbury may
add to challenges for vendors. That said, we believe Nomad’s scale and pan-European footprint
give it a competitive advantage over small, local players in these negotiations.
Preferred Shares Dilute the Share Count
Holders of Nomad’s Founders Preferred Shares receive an equity dividend when the company’s
share price appreciates over the prior year. For example, we expect the holders to receive a 7M
share dividend for 2019 based on the following calculation: 1) use the last ten trading days of
each year to calculate the stock price appreciation (we estimate 25%), 2) multiply the 25% gain
by a fixed modifier of 20% to get 5%, 3) multiply the 5% by the Preferred Share Count
Equivalent of 140M shares, which is the share count Nomad had when it bought Iglo in 2015.
In 2017 and 2018, these equity dividends increased the share count by 8.7M and171K shares
respectively, representing total dilution to common shareholders of about 5%. In addition, these
preferred shares will be converted into 1.5M common stock on the last day of the seventh
financial year following completion of the Iglo acquisition (2022), representing additional dilution
of about 1% on the horizon.
J.M. Smucker (Underperform Rating, $95 Target Price)
Valuation
Our target price of $95 assumes a forward EV/EBITDA of 10.3x against our FY21 estimate.
This assumes a discount of 20% to packaged food peers, below its historical discount of 8%.
We think the discount is justified because Smucker’s brands face significant competitive
pressures. A rebound in Coffee division margins from lower commodity costs represents the
largest upside risk to our thesis.
Bull-Case
Leadership in Good Categories
Smucker holds leadership positions in several growing categories including coffee (27% of
sales), pet food (36% of sales), and peanut butter and fruit spreads. The portfolio of iconic
brands includes Folgers, Dunkin’ Donuts, Jif, Milk-Bone, Meow Mix and premium pet food
brands such as Natural Balance, Nature’s Recipe and Rachael Ray Nutrish. Rising pet
ownership rates in the U.S., rising per capita consumption of coffee, and the trend toward
“premium-ization” in both categories have fueled the category growth.
Surprisingly Resilient Coffee Profit Margins
Coffee EBIT margins improved 250bps to 32%in FY19 vs. FY18. Management believes that it
can maintain its margins at this level due to the size and scale of its mainstream Folgers brand,
its favorable licensing contract with Dunkin’ and Keurig coffee (which supplies its K-cups), its
procurement expertise in coffee beans, and its competitive advantage over Kraft Heinz, which
has neglected to support Folger’s biggest mainstream competitor, Maxwell House.
The Board Is Taking Steps to Improve Performance
In November 2019, Smucker announced several organizational changes designed to improve its
performance. The company will conduct a candidate search for a newly created Chief Operating
Officer role reporting up to CEO Mark Smucker, a new leader of U.S. retail sales, and a new
leader in the struggling Pet Food division to replace Dave Lemmon. Consistent with the
concerns we expressed in our downgrade of the stock, management intends to hire an
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2020 Packaged Foods Preview 76
executive who has pet industry experience. In addition, it announced that CFO Mark Belgya will
retire in May 2020 after a successful tenure.
We like the decision to reinstitute the role of COO at the company and the possibility of bringing
someone with more of an outside perspective into the business. In our view, it shows that the
board understands the severity of the near-term challenges the company faces and is ready to
make necessary changes to improve its operational effectiveness.
Bear-Case
Investments Have Failed to Drive Organic Growth
In 2018, CEO Mark Smucker announced the company’s intention to correct several years of
underinvestment and introduce aggressive new investments to reinvigorate sales growth.
However these efforts failed to improve the top-line trends and led to further downward
revisions to margins and sales forecasts. This raises the possibility that Smucker’s problems
stem from structural issues rather than just lack of effort. Smucker has leadership positions in
two big, dynamic categories (coffee and pet food), but its brands are having trouble keeping up
with changing consumer preferences. In particular, the management team has yet to prove
adept at navigating the pet food category, which it entered through acquisition in 2015.
For example, Smucker’s attempts to premium-ize its Folgers brand (e.g. Folgers 1850 and
Folgers Noir) and introduce portable peanut butter snacks (Jif Power Ups) failed to provide
incremental growth. The Folgers brand in particular has struggled to attract younger consumers
to its franchise. In Pet, the company’s premium brands Nutrish and Natural Balance both face
major setbacks. We view the Pet Food division as the weakest link in the portfolio as
demonstrated by the downward revisions and asset write-downs since Smucker entered the
category in 2015.
Intensifying Competition from Premium Pet Competitors
Nutrish’s recent sales growth rate has been decelerating sharply since General Mills launched
its Blue Buffalo brand into Walmart and expanded its presence in Target. We believe that
increased merchandising support for Blue at these retailers came at the expense of Nutrish and
caused some pet owners to switch brands.
Blue Buffalo has increased the pressure on Nutrish in fiscal 2020 by airing a new advertising
spot which directly compares Blue’s “wholesome” ingredients to Nutrish’s. This marks the first
time that Blue has directly targeted Nutrish in its side-by-side comparisons. If this competition
continues, we think Nutrish’s sales could turn negative by the end of FY20.
We believe that Smucker’s pet brands are also highly vulnerable to the growing trend toward
fresh. Currently, many new private home delivery services provide fresh pet food to clients’
doors. Additionally, shoppers are being exposed to fresh pet food via FreshPet as it has
expanded its distribution in large retailers. As this trend gains additional traction, Smucker may
need to spend more on R&D or M&A to catch up.
Management Keeps Overpromising, Under-Delivering on Sales Growth
One of our pet peeves with Smucker management is that it tends to provide overly audacious
targets for sales growth even though its financial targets for executive compensation use EPS
exclusively. As a result, we have a lot of trouble buying into its claim that it can accelerate its
revenue growth rate to its long-term guidance of 2-3% through innovation, especially when just
about all of the company’s peers have lowered theirs. The enormity of the misses versus
expectations over the years and the lack of accountability in the executive compensation
framework to those sales expectations raises serious concerns about the returns on those
investments. Organic growth has averaged -1% for the past five years and looks to be declining
to -2% in FY 20.
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2020 Packaged Foods Preview 77
Margins May Revise Lower
The enormity of the management reshuffle announced in November indicates that Smucker’s
operational challenges are quite profound. With so much change on the horizon and the
company’s sales now firmly in negative territory, we believe that investment spending will need
to increase in FY 21 again and that the “discretionary” spending cuts announced this year will
need to reverse. As a result, we are forecasting an EPS decline in FY 21 compared to FY 20.
Management claimed in November that lowered FY 20 guidance enough to “de-risk” the year.
But in our view, downside risk still exists because the guidance assumes that profits improve to
flat in 2H after declining 3% in the 1H (excluding a gain on sale) despite a tougher year ago
comparison.
Difficult to Find a Talented COO to Help Lead This Business
Finding an executive to accept the COO role won’t be easy. Top-tier executives usually want to
see a clear path to the CEO seat when they come into an organization from the outside –
something that the Smucker family would be unlikely to promise.
7 January 2020
2020 Packaged Foods Preview 78
Figure 72: We Estimate That 35% of Smucker’s Portfolio Is Structurally Challenged
Source: Company data, Credit Suisse estimates. Nielsen xAOC+C
Tyson Foods (Outperform Rating, $98 Target Price)
Our $98/share target price reflects a 13.3x P/E against our FY21 EPS estimate of $7.20.
This assumes the stock’s P/E ratio improves versus its 10-year average of 11.2x.
Bull Case
Poised to Benefit from Declines in Global Protein Supplies
As the biggest protein producer in the U.S., the tighter global supplies of pork in the global
market will benefit the company in many ways:
Tyson’s chicken and beef prices will increase due to stronger exports. As China’s pig supply
continues to dwindle, Chinese consumers have begun to shift some of their consumption to
$ SALES BASIS (MM)
Good 2015 2016 2017 2018 L52 Wks
% of Total
2019 Sales 3-Yr CAGR L52 Wks
Dunkin' 459 570 606 645 672 9% 6% 4%
Meow Mix 472 474 471 478 503 7% 2% 6%
Uncrustables 177 199 218 269 303 4% 15% 14%
Nature's Recipe 95 102 180 225 236 3% 32% 6%
Bustelo 100 110 124 136 151 2% 11% 14%
Sahale Snacks 27 32 36 45 48 1% 15% 12%
Sub Total 1,330 1,487 1,635 1,797 1,912 26% 9% 7%
Stable 2015 2016 2017 2018 L52 Wks
% of Total
2019 Sales 3-Yr CAGR L52 Wks
JIF 768 769 762 762 751 10% -1% -2%
Rachael Ray Nutrish 300 434 556 629 646 9% 14% 5%
Smucker's 577 581 572 566 557 8% -1% -1%
Milk-Bone 404 431 416 408 427 6% 0% 5%
Kibble's N Bits 343 306 305 299 307 4% 0% 3%
Canine Carry Out 127 125 124 124 129 2% 1% 5%
Folgers 1850 0 0 0 30 48 1% 142%
Sub Total 2,519 2,646 2,734 2,817 2,865 39% 3% 3%
Challenged 2015 2016 2017 2018 L52 Wks
% of Total
2019 Sales 3-Yr CAGR L52 Wks
Folgers 1,920 1,804 1,686 1,597 1,536 21% -5% -5%
Crisco 383 384 328 321 310 4% -7% -4%
9 Lives 281 272 255 253 252 3% -2% -1%
Pup-Peroni 211 211 196 187 190 3% -3% 1%
Other Brands 241 221 197 189 177 2% -7% -7%
Gravy Train 120 120 122 86 81 1% -12% -13%
Milo's Kitchen 69 65 56 53 48 1% -10% -10%
Snausages 23 22 19 15 14 0% -14% -14%
Meaty Bone 21 19 14 12 11 0% -15% -5%
Alley Cat 13 12 9 9 8 0% -10% -6%
Sub Total 3,284 3,129 2,882 2,722 2,627 35% -6% -5%
Total Smucker 7,133 7,262 7,251 7,336 7,403 100% 1% 1%
7 January 2020
2020 Packaged Foods Preview 79
chicken and beef. This is a positive for Tyson’s global exports of chicken (about 8-9% of
chicken sales, mainly through leg quarters, thighs, and paws) and beef (about 16% of total
beef), because it increases the likelihood of China importing more protein. Even if China imports
from markets like Western Europe, Brazil, and Australia instead, the U.S. exports will still go
higher because they will need to backfill those supplies.
Tyson’s pork division margins will expand. Even with tariffs in place today, U.S. pork exports
have begun to accelerate. According to USDA data, U.S. pork exports to China have increased
over 100% in volume year-to-date ending October and are expected to continue to accelerate
higher as China’s pork reserves dwindle. Sending more pork volume to China will increase the
value of commodity pork prices and boost margins for Tyson’s Pork division. In addition,
because the Chinese pay a high premium for byproducts of pork processing that are
unappealing in the western market (such as pigs’ feet), margins can increase further.
Tyson’s Keystone chicken business in Asia is also a clear-cut beneficiary. This business
became a leading supplier of Chinese quick-serve restaurant chains by developing access to
high quality domestic chicken suppliers. With China’s domestic breeding flock aging and
Chinese consumers shifting their diets to more chicken, Keystone’s network becomes more
valuable.
The Dark Days of the Latest Chicken Cycle Are Behind Us
It appears the back half of 2018 was the trough of the current chicken cycle. Margins dipped
significantly due to production increases by both Tyson and its competitors as well as a shift in
feature and promotional activity away from chicken and into pork and beef. Since then, both the
supply and demand sides of the industry have shown signs of improvement (albeit very slowly).
The USDA forecasts 3.2% supply growth for the chicken industry domestically in 2020. We
think the supply growth will decelerate in 2021 as chicken processors come to the end of a
cycle of capacity expansion, especially if margins linger below normal levels. In addition, we
believe U.S. chicken exports will accelerate because of ASF’s decimation to China’s hog herd.
This would absorb a significant amount of the production increases that the USDA is
forecasting and drive chicken prices higher as a result.
Chicken Domestic Demand Is Likely to Accelerate
Both retailers and foodservice customers have increased their chicken features this year versus
year-ago levels. Tyson management has said that grocery retailers have been hesitant to
feature pork because they do not feel comfortable committing to promotions for pork products
as ASF continues to shroud the industry with supply uncertainty. Foodservice customers have
responded particularly well. Large foodservice chains like Wendy’s and Burger King, Popeye’s
and Kentucky Fried Chicken have featured chicken sandwiches for the summer and fall
seasons in 2019. McDonald’s is currently testing a chicken sandwich feature at several
locations. If that test is successful and McDonald’s decides to roll out a national launch of this
feature, then it is likely that all chicken prices rise in the near-term, because it is such an
influential buyer in the commodity market.
Bear Case
Chicken Competitors Might Increase Production Too Aggressively
Chicken producers have announced capacity expansion plans equivalent to a 5% increase in
industry capacity from 2017 to 2020. If chicken competitors expand too aggressively to take
advantage of the stronger protein markets, pricing will fall and margins will fail to recover.
Difficult to Predict ASF Outcomes
China’s hog herd has decreased significantly over the past several months stemming from ASF.
However, there is still a tremendous amount of uncertainty. Global protein prices may not
7 January 2020
2020 Packaged Foods Preview 80
increase to a degree that investors have hoped for, if China does not import as much protein as
expected.
Management M&A Strategy Has Yet to Yield Positive Returns
Since the start of FY18, the company has spent $3.6B on acquisitions across a wide variety of
segments in the meat industry both domestically and internationally. From an outsider’s
perspective, it is difficult to see a common thread across these transactions or evidence that
they have insulated the chicken business from industry cyclicality.
Tyson Family Controls the Voting Shares
The Tyson Limited Partnership controls 70% of the voting stock of the company. Investors
should recognize that this gives the Tyson family much more influence over the company’s
capital allocation strategy than common shareholders. John Tyson and his aunt Barbara Tyson
are members of the 12-person board. The numerous changes in the CEO seat since 2016
(from Donnie Smith to Tom Hayes to Noel White) is a concern.
Near-Term Margin Erosion in Prepared Foods May Exceed Our Expectation
We estimate that it will take 60-90 days for Tyson’s Prepared Foods businesses to pass
through pricing on products like lunchmeat, hot dogs, frozen sausage, and pizza toppings.
However, if input costs continue to climb higher, it will take longer to fully catch up.
Hiring Another Outsider Raises Questions
Tyson hired Dean Banks from Alphabet for the newly created role of President. The optics of
putting an executive from the technology health care industry into such an important
management role in the livestock industry aren’t too good, in our opinion. The Tyson board has
a history of making risky outside hires that end up not fitting well with Tyson’s distinct corporate
culture and struggling to understand Tyson’s commodity businesses. Recall that Tom Hayes
from Hillshire lasted less than two years as CEO and Wade Miquelon from P&G lasted only two
years as CFO. Getting buy-in from Tyson’s community of employees, livestock suppliers, and
customers will not be an easy task. That said, perhaps we should not underestimate the value
that an elite engineer who has worked on Google’s most influential moonshot projects might
bring to this company.
7 January 2020
2020 Packaged Foods Preview 81
Appendix
Figure 73: Organic Sales Growth
Source: Company data, Credit Suisse estimates
Organic Sales % 2012 2013 2014 2015 2016 2017 2018 2019E 2020E
MDLZ 4.5% 3.8% 2.4% 3.4% 1.3% 0.8% 2.4% 3.9% 3.5%
HSY 7.8% 7.9% 3.8% 0.2% 0.9% 0.9% 0.3% 1.8% 1.8%
MKC 6.0% 1.7% 1.7% 5.0% 3.2% 3.7% 2.9% 3.5% 3.5%
GIS 2.7% 2.3% -0.9% 0.5% -2.1% -4.2% 0.3% 0.1% 1.0%
CPB 1.6% 2.2% 0.9% 0.1% -1.4% -1.8% -1.6% 0.4% 0.5%
K 2.5% 0.3% -2.0% 0.3% -0.2% -2.6% 0.0% 1.9% 2.3%
KHC 0.1% 0.0% 0.8% -1.4% 0.3% -0.5% 0.8% -1.4% -0.8%
SJM 6.2% -3.6% -4.9% 1.1% -1.7% 0.5% 0.2% -1.7% -1.0%
CAG 0.6% -0.4% -2.9% -0.4% -3.3% -2.3% -0.1% 0.2% 0.6%
Average 3.4% 1.4% -0.4% 1.0% -0.3% -0.6% 0.6% 1.0% 1.3%
7 January 2020
2020 Packaged Foods Preview 82
Figure 74: Raw Materials as a % of COGS
Source: Company data, Credit Suisse estimates
Figure 75: Cash Conversion Cycles
Source: Company data, Credit Suisse estimates
CAG CPB GIS HSY K SJM MDLZ KHC CAG / PF
Total Packaging 19.8% 20.0% 17.0% 13.0% 17.0% 14.0% 20.0% 20.7% 19.3%
Food Costs 51.2% 38.0% 40.0% 55.0% 40.0% 66.0% 55.0% 44.3% 52.6%
Overhead/Labor 29.0% 42.0% 43.0% 32.0% 43.0% 20.0% 25.0% 35.0% 28.1%
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100%
Food
Flour 0.6% 3.2% 3.6% 0.0% 4.5% 0.0% 0.0% 0.6% 0.9%
Wheat 4.0% 1.2% 1.5% 0.0% 0.0% 0.0% 0.0% 0.0% 3.2%
Durum Wheat 0.0% 1.2%
Soybean Meal 7.0%
Corn 2.2% 0.0% 1.6% 0.0% 2.4% 7.0% 0.0% 0.2% 3.7%
Other Grains 0.0% 0.0% 2.0% 0.0% 2.7% 0.0% 0.0% 2.9% 1.2%
Vegetable Oil 9.8% 0.7% 1.6% 0.0% 1.6% 4.0% 4.4% 6.2% 8.1%
Sugar 0.5% 1.5% 3.2% 5.5% 6.0% 2.0% 15.0% 2.3% 1.2%
HFCS 3.0% 2.0% 3.0% 0.0% 1.1% 0.0% 0.0% 2.6% 2.7%
Cocoa 0.0% 0.5% 2.4% 22.0% 4.3% 0.0% 11.0% 0.0% 0.5%
Coffee 0.0% 0.0% 0.0% 0.0% 0.0% 20.0% 0.0% 2.1% 0.0%
Eggs 0.7% 0.6% 0.4% 0.0% 0.8% 0.0% 0.0% 0.9% 0.6%
Cheese 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 3.0% 5.1% 0.1%
Milk 1.6% 1.4% 2.5% 11.0% 0.0% 1.0% 1.8% 1.9% 1.6%
Tomatoes 4.1% 9.4% 0.7% 0.0% 0.0% 1.0% 0.0% 2.6% 3.7%
Potatoes 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.5% 0.1%
Peanuts 0.0% 0.0% 0.0% 5.5% 1.5% 12.0% 0.0% 0.0% 0.0%
Tree Nuts/Almonds 0.0% 0.2% 0.0% 1.7% 0.4% 0.0% 4.0% 1.0% 0.0%
Pork 6.6% 3.4% 2.3% 0.0% 0.3% 0.0% 0.0% 3.3% 5.4%
Beef 1.8% 1.7% 0.1% 0.0% 0.0% 5.0% 0.0% 1.6% 2.1%
Chicken 3.8% 1.7% 0.5% 0.0% 0.0% 7.0% 0.0% 0.2% 3.5%
Other 12.3% 10.6% 14.2% 9.4% 14.4% 0.0% 15.9% 8.3% 12.5%
Packaging
Paper Packaging 6.9% 4.0% 10.2% 5.2% 11.9% 2.0% 13.0% 9.6% 5.8%
Plastic Packaging 6.9% 4.0% 3.4% 5.2% 3.4% 8.0% 5.0% 5.2% 6.7%
"Metal" Packaging 5.9% 12.0% 3.4% 2.6% 1.7% 4.0% 2.0% 6.0% 6.3%
Overhead
Crude 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Energy (Nat Gas) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Labor 18.0% 32.0% 32.0% 20.0% 31.0% 8.0% 13.0% 24.6% 18.7%
Freight 4.0% 3.0% 4.0% 5.0% 5.0% 5.0% 5.0% 3.4% 4.0%
CASH CONV CYCLE 2013 2014 2015 2016 2017 2018 2019 2020
Campbell 57.05 62.42 59.78 52.04 44.87 67.40 54.94 67.97
ConAgra 56.88 54.99 46.51 74.22 36.53 31.71 48.09 26.48
General Mills 33.17 28.21 23.84 8.21 10.02 (0.02) (6.29) (5.58)
Hershey 42.56 57.06 54.19 47.97 48.39 50.75 49.93 48.39
Kellogg 27.32 21.44 7.04 (1.27) (8.67) (8.72) 7.40 18.00
Mondelez 29.04 19.23 1.30 (18.17) (23.82) (32.47) (37.21) (23.33)
Kraft-Heinz 14.53 (16.95) (17.76) (2.02) (18.44) (10.38)
McCormick 85.68 90.83 80.26 80.60 61.04 43.73 43.83 43.86
Smucker 80.70 84.47 101.36 53.45 55.46 45.93 46.79 25.77
Average 51.55 52.33 43.20 31.12 22.90 21.81 21.00 21.24
7 January 2020
2020 Packaged Foods Preview 83
Figure 76: Return on Invested Capital
Source: Company data, Credit Suisse estimates
ROIC 2013 2014 2015 2016 2017 2018 2019 2020
Campbell 16.2% 17.4% 17.3% 20.7% 20.7% 8.1% 10.0% 13.7%
ConAgra 7.2% 7.9% 8.8% 8.5% 11.9% 11.0% 6.1% 7.4%
General Mills 12.8% 12.4% 12.9% 14.1% 14.0% 8.4% 10.1% 10.4%
Hershey 36.7% 29.4% 31.6% 30.6% 32.9% 24.6% 26.3% 27.4%
Kellogg 14.5% 15.8% 15.0% 16.0% 13.2% 13.4% 12.5% 11.8%
Mondelez 7.7% 8.6% 6.6% 7.4% 7.4% 7.9% 7.6% 7.7%
Kraft 4.8% 6.1% 5.1% 5.9% 5.1% 4.7%
B&G Foods 7.4% 6.8% 4.8% 6.4% 6.5% 6.0% 5.8% 5.7%
McCormick 13.9% 14.8% 15.3% 16.4% 7.8% 9.6% 11.1% 11.5%
Smucker 8.6% 8.9% 5.4% 7.8% 8.3% 8.2% 8.1% 7.9%
Average 13.9% 13.8% 12.7% 13.9% 12.0% 10.2% 10.4% 10.9%
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Figure 77: Packaged Food Trading Comparisons
Source: FactSet, Company data, Credit Suisse estimates
Company Credit Suisse Price Market Enterprise Performance EV / EBITDA Net Debt / Payout
Company Rating TP 01/03 Cap Value YTD L52 FCF Div FY 2019 FY 2020 CY 2019 CY 2020 CY 2019 CY 2020 EBITDA Ratio
Agribusiness:
Archer Daniels N $40 $46.02 $25,619 $34,121 12.3% 12.9% -1.7% 3.0% $2.60 $2.95 17.7x 15.6x 11.4x 10.3x 2.8x 54%
Tyson O $98 $90.58 $33,096 $44,114 69.6% 66.2% 3.8% 1.8% $5.46 $6.50 15.8x 13.9x 10.4x 9.2x 2.7x 29%
Hormel N $38 $44.25 $23,662 $23,224 3.7% 6.2% 2.8% 2.1% $1.73 $1.73 25.6x 25.7x 17.2x 16.9x (0.3)x 54%
Sanderson Farms O $197 $175.16 $3,894 $3,808 76.4% 74.1% -1.1% 0.7% $2.41 $9.46 48.9x 18.5x 15.7x 8.0x (0.4)x 53%
Bunge O $65 $57.94 $8,208 $12,912 8.4% 8.5% -19.1% 3.5% $3.60 $3.37 16.1x 17.2x 8.2x 8.4x 3.0x 56%
Ingredion N $77 $93.70 $6,256 $7,988 2.5% 1.8% 4.6% 2.7% $6.50 $6.30 14.4x 14.9x 8.6x 8.7x 1.9x 38%
Average 28.8% 28.3% -1.8% 2.3% 23.1x 17.6x 11.9x 10.3x 1.6x 47%
SMID Food Producers:
McCormick N $160 $170.20 $20,842 $24,649 22.2% 24.9% 2.8% 1.3% $5.34 $5.78 31.6x 29.4x 21.2x 20.0x 3.3x 43%
Nomad Foods O $26 $22.25 $4,327 $5,445 33.1% 30.0% 8.4% 0.0% $1.38 $1.46 14.4x 15.2x 12.7x 10.6x 2.6x 0%
TreeHouse N $55 $47.84 $2,689 $4,646 (5.7)% (6.3)% 7.1% 0.0% $2.36 $2.44 20.2x 19.6x 9.9x 9.7x 4.2x 0%
B&G Foods U $14 $17.62 $1,128 $3,000 (39.1)% (38.5)% -0.2% 11.0% $1.64 $1.56 10.7x 11.3x 10.0x 10.2x 6.2x 118%
Freshpet N $58 $60.63 $2,188 $2,193 88.5% 90.2% -0.3% 0.0% $0.03 $0.63 1952.8x 95.7x 71.9x 40.8x 0.2x 0%
Beyond Meat N $115 $75.41 $4,639 $4,454 NA NA -0.5% 0.0% $0.01 $0.20 5084.3x 382.6x 195.7x 156.9x (8.2)x 0%
Average ex-BYND 19.8% 20.1% 3.6% 2.5% 406.0x 34.3x 25.1x 18.3x 3.3x 32%
Large Cap Packaged Food:
Kraft Heinz U $27 $31.24 $38,149 $66,086 (27.4)% (27.9)% 6.1% 5.1% $2.82 $2.45 11.1x 12.7x 10.9x 11.4x 4.6x 57%
Mondelez O $60 $54.24 $78,096 $95,843 35.5% 36.5% 3.6% 1.9% $2.47 $2.67 21.9x 20.3x 17.0x 17.7x 3.4x 42%
General Mills N $56 $51.94 $31,414 $45,454 33.4% 33.1% 7.2% 4.4% $3.22 $3.38 15.7x 15.4x 12.6x 12.3x 3.9x 71%
Kellogg O $78 $68.00 $23,163 $30,719 19.3% 19.8% 2.4% 3.4% $3.91 $3.97 17.4x 17.1x 13.5x 13.6x 3.3x 58%
Hershey N $155 $145.26 $30,348 $34,218 35.5% 36.7% 4.8% 2.1% $5.74 $6.17 25.3x 23.5x 17.1x 16.3x 1.9x 52%
Conagra N $32 $33.34 $16,223 $26,468 56.1% 54.6% 5.1% 2.5% $2.02 $2.08 16.2x 16.0x 13.7x 12.8x 5.7x 42%
Campbell Soup U $43 $48.43 $14,609 $23,177 46.8% 48.3% 6.8% 2.9% $2.30 $2.54 20.2x 19.1x 13.8x 14.1x 5.0x 62%
Smucker U $95 $102.29 $11,667 $17,476 9.4% 8.1% 6.7% 3.4% $8.29 $8.07 12.6x 12.7x 10.6x 10.8x 3.4x 42%
Average 26.1% 26.2% 5.4% 3.2% 17.5x 17.1x 13.6x 13.6x 3.9x 53%
Average U.S. Food * 16.4x 16.1x 12.8x 12.7x 4.3x 55%
High Ex-BYND 88.5% 90.2% 8.4% 11.0% 1952.8x 71.9x 40.8x 6.2x 118%
Average Ex- BYND 25.3% 25.2% 2.6% 2.7% 121.5x 16.1x 13.8x 3.0x 46%
Median Ex-BYND 22.2% 24.9% 3.8% 2.5% 17.4x 12.7x 11.4x 3.3x 52%
Low Ex-BYND (39.1)% (38.5)% -19.1% 0.0% 10.7x 8.2x 8.0x (0.4)x 0%
S&P 500 29.0% 32.1% 18.36 20.12
Consumer Staples Select SPDR 22.8% 24.3%
* U.S. Food average includes SJM, CPB, CAG, K, GIS, MKC, PF. Both GIS and MDLZ include equity investments in EBITDA. NOMD EBITDA raised 4% due to accounting change.
Yield P / EProjected EPS
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Companies Mentioned (Price as of 06-Jan-2020) Alphabet (GOOGL.OQ, $1361.52) Amazon com Inc. (AMZN.OQ, $1874.97) American Express Co. (AXP.N, $124.6) Anheuser-Busch InBev (ABI.BR, €74.27) Apple Inc (AAPL.OQ, $297.43) B&G Foods Inc - Class A (BGS.N, $17.62) Bayer (BAYRY.PK, $36.8325) Beyond Meat (BYND.OQ, $75.41) Campbell Soup Company (CPB.N, $48.43) Church & Dwight Co, Inc. (CHD.N, $70.27) Colgate-Palmolive Company (CL.N, $68.02) Conagra Brands (CAG.N, $33.34) General Mills (GIS.N, $51.94) Hormel Foods (HRL.N, $44.25) J.M. Smucker Co. (SJM.N, $102.29) Kellogg Company (K.N, $68.0) Kimberly-Clark Corporation (KMB.N, $135.79) McCormick & Company (MKC.N, $170.2) Microsoft (MSFT.OQ, $158.62) Molson Coors Brewing Company (TAP.N, $53.38) Mondelez (MDLZ.OQ, $54.24) Monster Beverage Corporation (MNST.OQ, $63.28) Nestle (NESN.S, SFr106.26) Netflix Inc. (NFLX.OQ, $325.9) Nomad Foods (NOMD.N, $22.25) PepsiCo (PEP.OQ, $135.63) Procter & Gamble (PG.N, $122.58) Sanderson Farms (SAFM.OQ, $175.16) Target Corporation (TGT.N, $124.76) The Clorox Company (CLX.N, $152.91) The Coca-Cola Company (KO.N, $54.69) The Estee Lauder Companies Inc. (EL.N, $204.7) The Hershey Company (HSY.N, $145.26) The Kraft Heinz Company (KHC.OQ, $31.24) The Kroger Co. (KR.N, $28.7) The Walt Disney Company (DIS.N, $146.5) Tyson Foods (TSN.N, $90.58) Walmart Inc. (WMT.N, $117.89)
Disclosure Appendix
Analyst Certification
I, Robert Moskow, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European (excluding Turkey) ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the an alyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin America, Turkey and Asia (excluding Japan and Australia), stock ratings are based on a stock’s total return relative to the average to tal return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’ s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 M ay 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
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Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may c over multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 48% (31% banking clients)
Neutral/Hold* 38% (26% banking clients)
Underperform/Sell* 13% (22% banking clients)
Restricted 2%
*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current hol dings, and other individual factors.
Important Global Disclosures
Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): GIS.N, HRL.N, KHC.OQ, PEP.OQ, KO.N, WMT.N, BGS.N, BYND.OQ, CPB.N, MDLZ.OQ, MKC.N, NOMD.N, AMZN.OQ, DIS.N, GOOGL.OQ, MSFT.OQ, NESN.S, AXP.N Credit Suisse provided investment banking services to the subject company (GIS.N, HRL.N, KHC.OQ, PEP.OQ, KO.N, WMT.N, BGS.N, BYND.OQ, CPB.N, MDLZ.OQ, MKC.N, NOMD.N, AMZN.OQ, DIS.N, GOOGL.OQ, MSFT.OQ, NESN.S, AXP.N) within the past 12 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): KHC.OQ, KO.N, WMT.N, CPB.N, MDLZ.OQ, AMZN.OQ, DIS.N, AAPL.OQ, GOOGL.OQ, MSFT.OQ Credit Suisse has managed or co-managed a public offering of securities for the subject company (KHC.OQ, KO.N, WMT.N, BGS.N, BYND.OQ, MDLZ.OQ, NOMD.N, AXP.N) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): GIS.N, HRL.N, KHC.OQ, PEP.OQ, KO.N, WMT.N, BGS.N, BYND.OQ, CPB.N, MDLZ.OQ, NOMD.N, AMZN.OQ, DIS.N, GOOGL.OQ, MSFT.OQ, NESN.S, AXP.N Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (GIS.N, HRL.N, SJM.N, KHC.OQ, KO.N, WMT.N, BGS.N, CAG.N, CPB.N, HSY.N, K.N, KR.N, MDLZ.OQ, MKC.N, TSN.N, MNST.OQ, NOMD.N, CL.N, AMZN.OQ, DIS.N, AAPL.OQ, GOOGL.OQ, MSFT.OQ, NESN.S, AXP.N) within the next 3 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: KHC.OQ, MDLZ.OQ, AMZN.OQ, DIS.N, AAPL.OQ, GOOGL.OQ, MSFT.OQ Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, non securities-related: KO.N, WMT.N, CPB.N, MDLZ.OQ, AMZN.OQ, DIS.N, GOOGL.OQ Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): GOOGL.OQ, AMZN.OQ, AXP.N, ABI.BR, AAPL.OQ, BGS.N, BYND.OQ, CPB.N, CHD.N, CL.N, CAG.N, GIS.N, HRL.N, SJM.N, K.N, MKC.N, MSFT.OQ, TAP.N, MDLZ.OQ, MNST.OQ, NESN.S, NFLX.OQ, NOMD.N, PEP.OQ, PG.N, SAFM.OQ, TGT.N, CLX.N, KO.N, EL.N, HSY.N, KHC.OQ, KR.N, DIS.N, TSN.N, WMT.N A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (GIS.N, HRL.N, KHC.OQ, PEP.OQ, KO.N, WMT.N, BGS.N, BYND.OQ, CPB.N, MDLZ.OQ, MKC.N, NOMD.N, AMZN.OQ, DIS.N, GOOGL.OQ, MSFT.OQ, NESN.S, AXP.N) within the past 12 months. As of the date of this report, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BYND.OQ, CAG.N, NESN.S). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (BYND.OQ).
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Credit Suisse is acting as an agent in relation to Nestle’s (NESN.S) ongoing share buy-back program. Credit Suisse is acting as Financial advisor to Nestlé in relation to disposal of its U.S ice cream business to Froneri
For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=480873&v=1enao0frb6ekjw2iogtc90555 .
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. This research report is authored by: Credit Suisse Securities (USA) LLC ........................................................... Robert Moskow ; Matthew Parker ; Jacob Nivasch
Important disclosures regarding companies that are the subject of this report are available by calling +1 (877) 291-2683. The same important disclosures, with the exception of valuation methodology and risk discussions, are also available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures . For valuation methodology and risks associated with any recommendation, price target, or rating referenced in this report, please refer to the disclosures section of the most recent report regarding the subject company.
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