| Key issue in food the ability of firms to pass on cost increases |
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| Gavin Kelleher, Food & Beverage Analyst, says that while food companies could pass on input price increases in 2007, with a weaker consumer environment likely in 2008, further prices increases may be more of a challenge. |
Looking into 2008, a key issue that investors will be focusing on across the Irish food companies will be input cost inflation and the ability of the companies to pass this on to customers in price increases. While it appears that a number of food companies were successful in passing on input price increases during 2007, with a weaker consumer environment likely in 2008, further prices increases may be more of a challenge. Another potential headwind for the Irish food companies in 2008 will be currency, with all companies (with the exception of Fyffes) facing significant dollar and/or sterling currency headwinds.
For Origin/IAWS and Greencore, the progress with (and possible valuation of) non core property assets will be important. Previous valuations are likely to come under pressure due to declining property values in Ireland although progress through zoning/planning process should (to a degree) reduce downside risk.
There will also be significant senior management change at a number of Irish food & beverage stocks during 2008. Greencore and Kerry, have new chief executives in place. In the case of Kerry, Stan McCarthy takes up the position of chief executive from Hugh Friel, and at Greencore, Patrick Coveney takes over from David Dilger. Geoff Doherty, former head of the Greencore’s property division, takes over as group finance director. Another key senior management change will be at C&C, where John Holberry, formerly managing director of Coors Sales Operation, takes over as Head of the group’s Magners Great Britain business. Investors’ key focus here will be whether the new divisional head can implement a strategy that can stabilise or reverse the market share declines Magners experienced in 2007.
For the Irish food & beverage stocks, 2007 can be best described as a mixed year. Glanbia was the best performing food stock, increasing 57 per cent in the year. The impressive share price performance was the result of strong earnings growth driven by Glanbia’s ingredients businesses which benefited from rising dairy commodity prices, along with good growth in nutritionals, boosted by the Seltzer acquisition which was completed in October 2006.
Kerry Group was the second best performing Irish food stock, up 15 per cent, recovering from a weak 2006 performance as earnings growth returned to a high single digit rate in 2007. In contrast, the worst two performing food stocks were C&C (-70 per cent) and IAWS (-22 per cent). C&C’s decline was driven by a poor performance from Magners in Britain, with volumes impacted by poor weather and intensive competition from Scottish and Newcastle’s Bulmers Original brand. In the case of IAWS, following a strong share price performance in the final quarter of 2006, its performance during 2007 was impacted by a high start of year valuation combined with concerns over continued wheat (and other input) price increases and worries over currency exposure. |
Gavin Kelleher is food and beverage analyst at Merrion Stockbrokers.
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| Article appeared in the February 2008 issue.
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