While stock picks have been made here, the summary even with the upside picks is that demand is still a challenge with management teams generally subdued regarding 2013 earnings growth. Soft demand in North America and Europe is trumping manageable cost inflations. BofA screened for stocks with company specific tailwinds from corporate actions, as well as those with product categories immune from consumer weakness, and those with strong developing market franchises.
BofA’s Spillane has identified some key themes for 2013 being led by actions in mergers, splits, and restructurings to offset slow organic growth. It sees soft domestic market demand, moderating input cost inflation and a potential for increased promotions. Today’s research also shows an expected developing and emerging markets rebound, profit growth in the domestic soft drink market, a move in health and wellness, and macro support for demand and pricing in alcohol.
BofA’s Top Picks: Constellation Brands Inc. (NYSE: STZ) and Kraft Foods Group Inc. (NASDAQ: KRFT). Constellation has an attractive valuation, improving share/growth in beer and wine, favorable wine industry supply and a potential catalyst if the Crown deal is approved. Kraft is said to be in the early stages of a multiyear cycle of productivity gains which should fund marketing increases and mid-single-digit profit growth.
The Top Categories isolated Beam Inc. (NYSE: BEAM) and The Hershey Company (NYSE: HSY). Beam was listed as having solid organic sales growth, early stages of industry wide price increases and as being likely impacted (favorably) by industry consolidation (i.e., mergers). Hershey was listed as having top-tier domestic sales growth, a cost tailwind and accretion from Brookside.
BofA’s Corporate Actions focused on ConAgra Foods Inc. (NYSE: CAG) and Dean Foods Co. (NYSE: DF). ConAgra has improving organic growth, accretion from bolt-on deals and the transformative nature of the Ralcorp deal. Dean Foods shares are said to currently not be reflecting the value from the The WhiteWave Foods Co. (NYSE: WWAV) IPO and pending asset sale.
Turnaround candidates are favored as Kellogg Co. (NYSE: K) and PepsiCo Inc. (NYSE: PEP). Spillane said, “We expect both companies to benefit from recent investments in marketing, new products and M&A. Kellogg should see more upside from Pringles while we are bullish on prospects for revived international growth at Pepsi.”
In Developing Markets rebounding, BofA favors The Coca-Cola Company (NYSE: KO) and Mondelez International Inc. (NASDAQ: MDLZ). Both were listed as having sustained consistent investment levels in developing markets over the past few years and both are believed to be positioned to accelerate as the consumer improves in these markets.
BofA also maintained its Neutral rating on Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR). The report said, “We are raising our price objective from $42 to $45 and our target multiple from 14.7x to 15.7x our FY14 EPS of $2.85, due to an overall increase in the packaged food group multiple.”
We might not have given this much thought except for one key issue. The Coca-Cola Company (NYSE: KO) was listed by all analysts out there as being one of the five most undervalued DJIA components for 2013.
JON C. OGG