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Ralcorp's Private Label Boom

Posted: Nov 14, 2008 13:38 PM by Glenn Curtis

Tickers in this Article: KFT, GIS, WMT, CAG, K, RAH

Food stocks are thought to be a great place for investors to put money during times of economic slowdown because, after all, everyone has to eat. Unfortunately, investing in food-related stocks over the past year has not amounted to surefire money-making means for investors.

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Shares of Illinois-based Kraft Foods (NYSE:KFT), a well-known producer of cereals and other food products, are down more than 13% over the 52-week period ended November 13. ConAgra (NYSE:CAG), another big name in food production, is off more than 33% during that same period. Despite the struggles of these heavy weights, shares of lesser known Ralcorp (NYSE:RAH) are performing quite well. Up more than 16% over the previous year, Ralcorp clobbers the S&P 500, which is off 37%. (Read about relative and absolute performance at What's the difference between absolute and relative return?.)

Private Label Benefits
Ralcorp may not be a household name, but most people have consumed the company's products at some point. Ralcorp produces private label foodstuffs ranging from cereals and waffles to corn chips. Retailers sell Ralcorp's wares under their own names or under store-specific labels. Wal-Mart (NYSE:WMT), for example, competes against the likes of General Mills (NYSE:GIS), Kellogg (NYSE:K) and Kraft Foods by selling Ralcorp-made products.

Private label businesses should perform well in the months ahead due in large part to the slowing economy. Private label brands are attractive to consumers who seek high quality products, at lower prices. National brands may equal private label companies in quality, but their astronomical advertising budgets preclude the possibility of lower prices. Thus, Ralcorp should be an attractive pick for consumers and investors alike.

Ralcorp's Latest Numbers
Although Ralcorp has been on my radar for some time now due to the stock's general performance, my interest was piqued further by its fourth quarter numbers, released before the opening bell on November 12. During the quarter ended September 30, the Missouri-based company booked a profit of $41.1 million, which translated into an EPS of 90 cents. Ralcorp's earnings rose sharply higher than the $12.2 million, or 46 cents per share, it posted for the same period last year. Pricing increases and the addition of the recently acquired Post Foods helped boost the results.

On November 12, the day Ralcorp released its earnings, the Dow Jones Industrial Average was down more than 400 points, while Ralcorp shares were up more than 5%. Thus, I was inspired to investigate a few other metrics to determine whether or not the stock could head higher.

A quick look into insider data reveals a purchase of 2,000 shares in late August by Ralcorp director David Wenzel, who paid roughly $60 per share. Insider buying is not a guarantee of future stock price performance. However, a company executive would not purchase a few thousand shares unless he or she thought there was a good chance of making money. (Can following insider purchases help you be a better investor? Find out at Can Insiders Help You Make Better Trades?.)

Ralcorp is expected to earn $4.22 per share in fiscal 2009, which is a respectable gain for a stock that trades around $69. In addition, data indicates that the company is expected to grow 8% per annum for the next five years. For a company with almost $4 billion in expected sales for 2009, Ralcorp's growth looks solid. (Read more about earnings guidance at Can Earnings Guidance Accurately Predict the Future?.)

Bottom Line
Consumers will continue to keep a tight hold of their purse strings and increasingly flock to private label products so long as the economy remains in sharp decline. Recent insider purchases and strong growth expectations make Ralcorp an ideal pick.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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