Read the Ten Cheap Products Making American Companies Billions

All of the companies that make the most money from selling inexpensive items have exceptionally strong brands. They are highly recognizable and held in high regard. Coca-Cola, which makes billions of dollars off its trademark drink Coke, is the most valuable brand in the world, according to brand valuation company Interbrand. According to Brand Z, McDonald’s, producer of the world’s favorite french fries, is the most valuable brand. Other brands, such as Cheerios, Campbell’s, and Starbucks, are also instantly recognizable.

These products have such strong brands partly because their parent companies spend huge sums of money on advertising. In 2011, Procter & Gamble, maker of Gillette razors, spent $9.3 billion on ads for all products — 11.3% of its total sales. This amount increases substantially each year, reflecting the lengths companies must go to preserve market share. Ian Cook, chief executive of Colgate-Palmolive, recently promised “increased advertising support behind many new and existing Colgate products” in 2012 to protect its global standing. The company said it had increased advertising spending in the fourth quarter to $428 million, up 5% from one year ago.

Additionally, these brands benefit from having been around for years and having existed in the public conscious a very long time. Products such as Coke, Colgate toothpaste, and Dole bananas have been around since the 19th century. Campbell’s soup and Cheerios have been household staples since the middle of the 20th century. Consumers have grown to trust the brands and expect a certain level of quality.

24/7 Wall St. reviewed the 500 largest companies by sales to identify the ones that focus on inexpensive consumer goods and low-priced food products. We then looked at the most inexpensive products sold for less than $5 and hold the highest market share. These are the cheapest products making American companies billions.

The US Department of Agriculture is forecasting a global corn crop of 867.5 million metric tons and analysts survey by Bloomberg News are forecasting a price of $4.305/bushel next year. Corn is trading today at about $6.20/bushel.

Demand for meat is driving the demand for corn and wheat as feed for cattle, pigs, and chickens, with total demand for feed expected to reach 640.6 million metric tons in the crop season ending next Spring.

The US share of the booming corn crop will decrease to less than 50% for the first time in 40 years.

The unofficial closing bells put the DJIA up nearly 336 points to 12,101.92 (2.85%), the NASDAQ rose more than 80 points (3.19%) to 2,603.73, and the S&P 500 rose 2.98% or nearly 36 points to 1,241.22.

There were several analyst upgrades and downgrades today, including AT&T Inc. (NYSE: T) cut to ‘neutral’ at JPMorgan. Other ratings actions today include F5 Networks Inc. (NASDAQ: FFIV) cut from ‘perform’ to ‘underperform’ at Oppenheimer; Urban Outfitters Inc. (NASDAQ: URBN) raised from ‘outperform’ to ‘Top Pick’ at FBR Capital; Amgen Inc. (NASDAQ: AMGN) added to ‘Strong Buy List’ at Zacks; and Baxter International Inc. (NYSE: BAX) lowered from ‘Top Pick List’ to ‘outperform’ and target price lowered from $61 to $58 at RBC Capital Markets.

Here are today’s post-earnings news reactions with prices during the last half-hour of trading: ConAgra Foods Inc. (NYSE: CAG) is up 4% at $26.18; General Mills Inc. is down about -1% at $39.19; Navistar International Corp. (NYSE: NAV) is up nearly 7% at $39.05; Sanderson Farms Inc. (NASDAQ: SAFM) is down -4% at $48.66; and Jefferies Group Inc. (NYSE: JEF) is up more than 22% at $14.46. After markets close today we get earnings from Nike Inc. (NYSE: NKE) and Oracle Corp. (NASDAQ: ORCL). See our 360 coverage on Oracle here and coverage of the ConAgra and General Mills reports here.

Other standouts from today include the following stocks:

Targacept Inc. (NASDAQ: TRGT) is down more than -35% at $5.01, after posting a new 52-week low of $4.92 earlier in the day. The pharmaceutical maker’s anti-depressant drug, developed in conjunction with AstraZeneca plc (NYSE: AZN) has failed a late-stage trial.

Cobalt International Energy Inc. (NYSE: CIE) is up nearly 38% at $13.81. The oil & gas exploration company has signed a production-sharing agreement for a block offshore of Angola. Cobalt owns 40% of the project and is the operator.

Canadian Solar Inc. (NASDAQ: CSIQ) is up nearly 33% at $2.93. The solar panel maker has sold about 86 megawatts of generation to TransCanada Corp. (NYSE: TRP) for approximately $455 million.

Prestige Brand Holdings Inc. (NYSE: PBH) is up nearly 21% at $11.27. The drug and cleaning supplies company paid $660 million for a selection of nonprescription drugs from GlaxoSmithKline PLC (NYSE: GSK).

Hovnanian Enterprises Inc. (NYSE: HOV) is up more than 18% at $1.50. The home builder is riding the wave of good news about new housing starts.

CVS Caremark Corp. (NYSE: CVS) is up about 9% at $39.85, after posting a new 52-week high earlier of $39.86. The healthcare company raised fiscal year guidance and boosted its quarterly dividend by 30%, to $0.1625/share.

Stay tuned for Wednesday. The most widely anticipated report for tomorrow is due at 8:30 a.m. from the National Association of Realtors, which will be revising its new home sales data from 2007 forward. Lower sales of up to -13% are expected. Here are other noteworthy events on the schedule (all times Eastern):

• 7:00 a.m. – Mortgage Bankers Association purchase applications
• 10:30 a.m. – EIA weekly petroleum status report
• 1:00 p.m. – 7-year Treasury note auction

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Paul Ausick

ConAgra reported reported adjusted EPS of $0.47, compared with a consensus estimate of $0.43. Revenue came in at $3.4 billion, compared with an estimate of $3.34 billion. In the same period a year ago, ConAgra posted EPS of $0.46 on $3.15 billion in revenue.

General Mills reported adjusted EPS of $0.76, below estimates of $0.79. Revenue beat expectations of $4.6 billion, coming in at $4.62 billion. A year ago, General Mills posted adjusted EPS of $0.92 on revenue of $4.1 billion.

ConAgra expects EPS growth in the low- to mid-single digit range for the 2012 fiscal year. The current consensus EPS estimate is $1.80 for the full year ending in May, compared with EPS of $1.75 last year. ConAgra, which failed in a hostile takeover attempt on Ralcorp Holdings Inc. (NYSE: RAH), has been making small acquisitions to boost its revenues.

General Mills forecasts full-year EPS of $2.59-$2.61, while the consensus estimate is $2.61, up from $2.48 last year. The company is looking to its recently acquired controlling stake in yogurt maker Yoplait to help boost earnings.

In the early afternoon today, ConAgra shares are up more than 3.5% at $26.10, after posting a new 52-week high this earlier of $26.38. Trading volume is heavy, with 4.8 million already having trading hands today, compared with a daily average of 4 million.

General Mills shares are down about -1.5% at $39.00 in a 52-week range of $34.54-$40.72. Volume is also heavy in the shares, with more than 5 million traded so far today compared with a daily average of about 4.6 million.

Paul Ausick

Large farm products companies like Archer Daniels Midland Co. (NYSE: ADM) and Bunge Ltd. (NYSE: BG) have watch corn and wheat prices decline by about -20% and -29% since peaks earlier this year. Fertilizer prices have risen and so have fuel prices. All have an impact on revenues and earnings.

Processing companies like Tyson Foods Inc. (NYSE: TSN), Smithfield Foods, Inc. (NYSE: SFD), Corn Products International Inc. (NYSE: CPO), and ConAgra Foods, Inc. (NYSE: CAG) package private label foods, provide commercial food, and even offer some branded products. The diversity of their customers gives them a bit of a barrier against a collapse in one or another of their markets.

Packaged food giants like Kraft Inc. (NYSE: KFT), Sara Lee Corp. (NYSE: SLE), General Mills, Inc. (NYSE: GIS), and Kellogg Company (NYSE: K) are all household names and depend on strong brands to carry them through slow economic times.

Data from Yahoo! Finance, and current share prices gathered about noon today.

Archer Daniels Midland Co. (NYSE: ADM) has a median target price of $35.00 from 13 brokers. Shares are trading today at $28.88, for an implied gain of $6.12, or 21%. ADM’s forward P/E is 8.52 and the company pays a dividend yield of 2.3%. The stock’s 52-week trading range is $23.69-$38.02, and at today’s price that’s about 22% above its 52-week low and 24% below the 52-week high. This year’s wheat harvest looks to be on a near-record pace, and wheat prices are expected to fall to below $6/bushel by the end of the year from a current price of around $6.36.

Rising corn prices hit ADM hard in its most recent quarter, lowering profit in its biofuel (ethanol) division by -23% and in its sweetener and starches division by -81%. Corn prices are currently expected to remain about the same into next year, which won’t help ADM’s processing revenue. Fortunately for the company its trading profits will get a boost from the higher corn prices.

Bunge Ltd. (NYSE: BG) has a median target price of $74.00 from 11 brokers. Shares are trading today at $61.38, for an implied gain of $12.62, or 21%. Bunge’s forward P/E is 9.32 and the company pays a dividend yield of 1.6%. The stock’s 52-week trading range is $54.03-$76.13, and at today’s price that’s about 14% above its 52-week low and 19% below the 52-week high.

Bunge missed EPS estimates badly in its third quarter as the company ran afoul of volatility in the grain markets. The company painted a brighter picture for its fourth quarter, basing its view on the tightness of supply and the rising demand for food.

Tyson Foods Inc. (NYSE: TSN) has a median target price of $23.00 from 15 brokers. Shares are trading today at $19.27, for an implied gain of $3.73, or 19%. Tyson’s forward P/E is 9.53 and the company pays a dividend yield of 0.8%. The stock’s 52-week trading range is $14.79-$20.12, and at today’s price that’s about 30% above its 52-week low and 4% below the 52-week high.

Tyson will report earnings for its fourth fiscal quarter on November 21st. The consensus EPS estimate is $0.32, half as much as the same period a year ago. Rising feed costs have hammered revenues and earnings this year, and Tyson and other chicken producers are trying to get its customers to share commodity price risk by taking shorter term contracts tied to the cost of feed grains.

ARM Holdings plc (NASDAQ: ARMH) Raised to Buy at Citigroup.
CareFusion Corporation (NYSE: CFN) Raised to Buy at BofA/ML.
ConocoPhillips (NYSE: COP) Cut to Underperform at Macquarie.
Edison International (NYSE: EIX) Added to US Focus List at Credit Suisse.
General Mills, Inc. (NYSE: GIS) Added to Conviction Buy List at Goldman Sachs.
Goldman Sachs Group Inc. (NYSE: GS) estimates cut to expect a loss by Citigroup.
PDL BioPharma, Inc. (NASDAQ: PDLI) Cut to Sector Perform at RBC.
SAP AG (NYSE: SAP) Started as Buy at Citigroup.
Smithfield Foods Inc. (NYSE: SFD) Raised to Buy at BofA/ML.
Sprint Nextel Corporation (NYSE: S) Cut to Hold at Argus; Removed from U.S. Focus List at Credit Suisse.
Stryker Corporation (NYSE: SYK) Raised to Buy at BofA/ML.
Telefonica, S.A. (NYSE: TEF) Cut to Neutral at Goldman Sachs.
Telecom Italia SpA (NYSE: TI) Cut to Sell at Goldman Sachs.
Tyson Foods Inc. (NYSE: TSN) Raised to Buy at BofA/ML.
Valero Energy Corporation (NYSE: VLO) Raised to Overweight at Barclays.

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The tough economy could cause a wave of new Chapter 11 filings by large companies like Eastman Kodak (NYSE: EK) and AMR (NYSE: AMR). (Reuters)

New York state’s comptroller Thomas DiNapoli says Wall St. could shed 10,000 jobs if the financial sector remains troubled. (Reuters)

Netflix (NASDAQ: NFLX) to recombine its DVD and streaming video businesses. (Reuters)

The euro gains on optimism that the region will improve its fortunes through new bailout plans. (Reuters)

Facebook releases an application for the Apple (NASDAQ: AAPL) iPad. (Reuters)

Brent crude moves above $109 on optimism about the economy. (Reuters)

Research In Motion (NASDAQ: RIMM) restores service in some nations where it has tech problems. (Reuters)

China buys shares in its troubled banks. (WSJ)

Samson Investment, an oil and gas firm, may sell itself for $10 billion. (WSJ)

Grocery stores allow customers to use smartphones to shop based on price. (WSJ)

General Mills (NYSE: GIS) tries to reduce sugar in cereal, only to find that children want it. (WSJ)

Sprint-Nextel (NYSE: S) will have to pay high rates to raise money. (WSJ)

Tata Coffee and Starbucks (NASDAQ: SBUX) to open stores in India. (WSJ)

Airlines rapidly adding WiFi to airplanes. (WSJ)

Longacre Fund Management to close many of its funds due to poor returns. (WSJ)

The Volcker rule, set to limit bank risk, will be made public soon. (NYT)

The EU delays a debt crisis meeting in which details are worked out. (NYT)

The ISS advisory group says investors should vote against 13 of the 15 members of the board of News Corp. (NYSE: NWS). (FT)

Some EU nations still want private investors to take larger write-downs on Greek debt. (Bloomberg)

Douglas A. McIntyre

The most attractive stock investments for periods when GDP growth stalls are those of corporations that proved they could improve sales during the 2007-2009 recession. Many of these corporations have additional attractions. They often generate so much cash they can afford to pay large dividends. This gives investors yields when the value of many equities fall due to concerns about the economy and in a period that interest rates on bonds are near all-time lows.

Recession-resistant companies are also often part of recession-resistant industries. Many of these industries’ sales come from a number of countries around the world. Their sales may slow in the U.S. and Europe, but remain strong in emerging nations. Coke and P&G are examples of corporations in such industries. Other companies are in sectors whose products are used in almost any economic environment. Tobacco companies like Altria and Reynolds American are examples of these. Still other industries have companies that have appeal in an economic downturn. McDonald’s, which offers many meals for a few dollars, often prospers when people cannot afford fresh groceries or more expensive restaurants.

24/7 Wall St. picked its recession proof companies by choosing: 1) corporations with revenue that grew during the last recession or where sales dropped slightly and profits rose, 2) companies in industries that are not usually sensitive to changes in the economy, 3) corporation that have demonstrated they have the balance sheet to pay large cash dividends, 4) corporations that are large enough to be among the most dominant companies by sales or market share within their sectors, and 5) stocks that trade within 10% of their 52-week highs. With the S&P 500 near a one year low, these are obviously companies that Wall St. thinks will do well over the next several quarters.

This is the 24/7 Wall St. “America’s Recession-Proof Companies”

The maker of Chef Boyardee, Healthy Choice, PAM no-stick cooking spray and other food products, has made several unsuccessful bids for Ralcorp since March, culminating in a recent $94.00 per share offer in cash. St. Louis-based Ralcorp has repeatedly spurned the offers, opining it could best unlock shareholder value by spinning off its Post Foods division, which includes brands Honey Bunches of Oats, Grape Nuts and Fruity Pebbles, from its private label (store brand) and ready-to-eat foodstuffs (like cereals, cookies and pasta).

Golden Parachutes for Key Executives

Considering the purchase price was higher than Ralcorp has ever traded at, it is hard to fathom why senior management failed to endorse ConAgra’s offer, especially given the personal payday that awaited each of them under “change-in-control” clauses contained in their respective employee agreements. In a buyout, co-chief executives Kevin Hunt and David Skarie each stood to pocket, at a minimum, $15 million (including $3.7 million in accrued salaries and cash bonuses, and in excess of $6 million in stock awards). Chief financial officer Thomas Granneman left more than $5 million on the table, too (including $3 million in three-years worth of salary and average annual cash bonuses, and more than $2 million in stock awards). Furthermore, actual payouts to named executives would have been significantly higher, as these severance packages were based on the closing price of Ralcorp on September 30, 2010 ($58.48 a share), according to the 2011 proxy statement.

Post Brand Cereals Were the Future — Back in 2008

That management and the board of directors now believe that a spin-off of Post brands is the better option to boost value for its shareholders — as opposed to an acquisition by ConAgra — is odd, considering the same guys were the cheerleaders behind the $2.6 billion purchase of the same ready-to-eat brands from Kraft Foods (NYSE:KFT) in 2008.

“A transforming event for Ralcorp — the addition of Post cereals gives Ralcorp a truly distinctive line of branded cereal products plus a branded infrastructure and platform that we can build on through organic growth and acquisitions,” David P. Skarie said in November 2007.

For the nine-months ended June 30, segment profit for Post brands contributed 33.3%, or $160.6 million, of $481 million in total segment profits. By comparison, Ralcorp derived just $64.4 million, or 13.3% of income from the manufacturing of third-party cereals. In addition, branded profit margins of 22% almost doubled those of its private-label operations.

Though Post-branded cereals remain the profit cow for the company, the Kraft purchase did not exactly shake up the cereal category or propel Ralcorp above also-ran status. The brand remains mired in third place and, looking ahead, management is acutely aware that growing margins will be difficult, given competitive obstacles, the incessant promotional and bidding wars with industry leaders Kellogg (NYSE: K) and General Mills (NYSE: GIS) for slotting space on the shelves of supermarket chains and discount retailers such as Walmart (NYSE:WMT).

Management has admitted, too, on recent quarterly conference calls that operating efficiency gains will unlikely be significant enough to offset the adverse effect of $200 million in cost inflation, from increases in packaging and freight to primary ingredients (such as durum wheat, cashews and peanuts).

Ralcorp is the nation’s largest supplier of private label cereal, including copycats of more than 30 of the top national brands and (20 hot cereals). Ergo, looking ahead, management believes manufacturing higher unit volumes of store brand products could better insulate forward profitability from the aforementioned competitive headwinds.

Some on Wall St., disagree with Ralcorp’s internal optimism. Morningstar analyst Erin Lash argues that spinning off Post would prove to be a “value-destroying investment for Ralcorp’s shareholders,” as Post trails rivals Kellogg and General Mills in the “highly-competitive’’ cereal category.

It is unlikely that a Post spin-off would improve Ralcorp’s financial flexibility. On June 30, trailing twelve-month total debt stood at 3.2 times operating EBITDA and more than 70% of total assets on the balance sheet was fluff: some $4.8 billion of goodwill and other intangibles.

According to regulatory filings, as part of the split, Post is expected to generate approximately $1 billion in net cash for the company. However, $545 million of these proceeds will go towards the company’s August 2011 purchase of Sara Lee’s (NYSE: SLE) refrigerated dough business, leaving little left over to make a dent in the $2.4 billion in long-term debt.

In addition, the 10Q Detective notes that post-split, private-label Ralcorp will lose the cash flow contribution from the higher-margin branded cereal business!

Break-Up Value?

Ralcorp appears fairly valued based on sector comparisons: 18.6 times trailing twelve-month (TTM) price-earnings, which is 16.2% and 28.7% higher than the TTM of Kellogg and General Mills, respectively.

Wall St. itself is divided on much additional market value a Post cereal spin-off would generate longer-term to existing shareholders, with post-split capitalizations ranging from the mid $70-range up to $90 a share. BB&T Capital Markets analyst Heather Jones estimates the private label part of Ralcorp could fetch an estimated 9 to 9.5 times EBITDA, and Post about 8 times, suggesting a total post-split value of $85 to $90 a share — lower still than ConAgra’s $94 per share (all cash) offer!

“Cuckoo” — but Not for Cocoa Pebbles

Even with a mouthful of cereal and milk, the audible sounds of fiduciary irresponsibility by the board cannot be muffled. One is left to ask, did the board fear losing more than complimentary boxes of Cocoa Pebbles in a ConAgra takeover — such as the cushy $200,000 (+) annual stipend for showing up eight to 13 times a year for board meetings?

While frustrated Ralcorp shareholders are left pondering what possessed the board to ignore ConAgra’s more-than generous merger bid, they might also want to question management on the following potential conflict, too: How come this “independent board” still sits three members with common ties to Energizer Holdings (NYSE: ENR), including William P. Stiritz, who chairs Ralcorp’s board, and J. Patrick Mulcahy, Energizer’s current chairman? It has been 17 and 11 years, respectively, since the food and battery companies were sent packing from the Ralston Purina (NYSE: RAL) family.

Since when does selling batteries make one an expert on food goods? Unfortunately, it is unlikely the Energizer bunny can do much to keep Ralcorp’s stock price “going and going.”

David Phillips

ConAgra’s offer for Ralcorp, maker of Post cereals, came in at about $94/share in cash, a level Ralcorp stock had not reached in its entire history. Ralcorp, though has a plan to spin-off the Post cereal business as a separate company, and has been bulking up the other part of its business by making acquisitions of its own.

Ralcorp’s stock dipped below $74/share yesterday before closing at $75.23. The company’s 52-week high is $91.35.

The packaged food business has not exactly been on fire lately. Kraft Foods Inc. (NYSE: KFT) shares are up about 10% since the January, while General Mills Inc. (NYSE: GIS), H.J. Heinz Co. (NYSE: HNZ) and ConAgra are up about half that. Sara Lee Corp. (NYSE: SLE) shares are down slightly since January, as the company pieces itself off. Ralcorp purchased one of Sara Lee’s products earlier this year for $545 million.

Packaged food processors face rising energy costs and wary consumers for their branded products. Many customers are now satisfied to buy private-label products, and not pay the premium for Peter Pan peanut butter. Profits get hit by rising costs which force producers to raise prices which then have to be passed on to consumers. The attraction of Ralcorp for ConAgra was its substantial private-label business, which is more profitable than the branded business, particularly as consumers are looking for ways to save money.

Once Ralcorp spins-off its Post cereal brands, ConAgra or another buyer is likely to return for another go at acquiring Ralcorp. At least that’s what the company’s board is banking on. If a bidding war doesn’t materialize, shareholders could get a bit fiesty over the rejection of ConAgra’s bid.

ConAgra’s shares are down about -2.25% in the pre-market this morning. The stock’s 52-week range is $21.02-$26.60. Ralcorp shares are also down in the pre-market, at $74.74, in a 52-week range of $57.10-$91.35.

Paul Ausick