One of the biggest advantages of attending industry meetings like the annual Consumer Analyst Group of New York (CAGNY) conference is the exposure we get to many of the management teams in attendance. Sure, there are plenty of canned presentations from the companies presenting, but there are also rare moments of candor, interesting observations on body language when executives answer difficult questions, and conversations with other financial analysts and investment professionals about the companies we cover. These types of observations and conversations force us to look deeper into our assumptions and long-term forecasts, and ultimately improve the level of research we produce for our readers.In a recent strategist article, my colleague Mitchell Corwin outlined some of the key takeaways from this year's presentations, and we're currently incorporating into our research a cornucopia of impressions from the firms that presented. Going into the conference, we felt that our sales growth and profitability assumptions for the food and beverage manufacturers were on the conservative side, as they reflected the challenging environment that many of these firms are facing. And for the most part, we heard nothing during the course of the conference to change that line of thinking. In cases where we walked away with less comfort about a firm than we had going in, we've already moved to adjust our forecasts and, if warranted, our fair value estimate.
Commodity Cost Inflation Is Priority OneMuch as we had anticipated, commodity cost inflation was the main topic of conversation during the presentations made by many of the packaged-food and beverage firms. Given the unprecedented runup we've seen in some commodities such as wheat, corn, and cooking oils in just the past six months alone, it was unlikely that these companies would be able to avoid talking about commodity cost inflation. It should be noted, however, that this is not necessarily a new issue for the food and beverage producers, who are now dealing with what is likely to be a fifth consecutive year of commodity cost inflation. As such, the continued run-up in the prices of many raw materials creates a bigger problem for these firms, many of which have used a combination of productivity enhancements and price increases over the past few years to cover the rising cost of raw materials.
Firms like General Mills (NYSE:GIS - News) have resorted to less-transparent price increases such as reducing the size of its cereal boxes while keeping the price per box the same. This serves to limit the weapons the food and beverage producers have at their disposal, and increase the need for more transparent price increases in the year ahead to cover the rising cost of raw materials. In other cases, companies have either been late to take price increases or haven't taken pricing up early enough to cover the rapid rise in raw material costs, which means they'll need to take larger price increases this year in order to return their profit margins to more normal levels.
Read More
