From snacks to riches
Demand for snacks and cafeteria meals means steady growth for Pepsico and food-distributor Sysco.
NEW YORK (Money) -- Many economists caution that growth could slow during the first six months of 2007. And investors have recently been favoring defensive stocks.
That should be good news for the shares of top-quality food companies like Pepsico and Sysco, both of which turned in double-digit earnings gains for the most recent quarter.
Such stocks make a lot of sense in the current environment. Demand is predictable - no matter what the economy does, people still have to eat - and companies such as Pepsico and Sysco are projected to turn in superior returns with below-average risk.
Pepsico created the most basic example of synergy by combining salty snacks with its thirst-quenching beverages. And gains at the domestic Frito-Lay division helped produce strong gains in fourth-quarter earnings.
Robust growth in international business was also a major contributor to Pepsico's results.
On a comparable basis, earnings per share rose 11 percent on a 7 percent increase in revenues. That was in line with analysts' positive expectations.
Some analysts caution that slowing growth in the domestic beverage business - particularly at the Tropicana and Gatorade divisions - could be a drag on 2007 results.
But other analysts point to a continuation of strong international sales that should enable the company to stay on track.
Overall, earnings per share are expected to grow more than 10 percent this year, and then continue at an 11 percent compound annual rate. The shares also yield 1.9 percent.
At $63.72, the stock trades at about 19.3 times estimated earnings for the current year and 17.3 times next year's projected results. That's a fair price for a stock that has provided very predictable returns over the past couple of years.
You might not think that providing food and utensils to restaurant chains, universities and hospitals would be a growth business. But Sysco has managed to turn such a basic business into a great formula for long-term success.
For the most recent quarter, earnings per share climbed more than 15 percent on a 7.5 increase in sales.
And analysts expect the gain for the current fiscal year, ending June 30, to top 18 percent.
During the past couple of years, the share price hasn't gained much. But over the past decade, the stock has nearly quadrupled.
Sysco's current problem is simply that it has been so successful for so long. As the company has grown, it has come to dominate the business so thoroughly that further gains in market share are hard to come by.
And if the company has any trouble reinvesting its profits, Sysco can always funnel its ample cash flow into a higher dividend.
The company has one of the best records among the Sivy 70 for dividend increases, having raised its payout for 37 years in a row.
At $34.15, the shares trade at 21.3 times earnings for the current fiscal year and 19 times earnings for the coming year.
Given the company's reliability and above-average growth prospects, Sysco looks most attractive for growth-and-income investors. The stock's current 2.2 percent yield should be able to maintain its schedule of annual increases for many years to come.
Recently in Sivy on Stocks: