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Summary

  • The NRF projected American consumers will spend $7.52 billion in total celebrating Independence Day.
  • Consumer packaged goods companies stand to benefit the most from the national holiday.

As more people get vaccinated across the country and restrictions on large gatherings are lifted, consumers are looking forward to cooking out and watching firework displays to celebrate Independence Day.

Out of the total $7.52 billion being spent to commemorate the 4th of July, the National Retail Federation found that most of that would be allocated to food for backyard BBQs. The planned per-person spending is expected to be an average of $80.54 for food items.

As a result, investors may be interested in consumer packaged foods companies that are fairly valued based on the GF Value Line.

Using the GuruFocus Fair Value Line, a unique method of estimating the intrinsic value of a stock, investors can find potential value opportunities. Based on the popular Peter Lynch value line, which compares a stock’s current price to how much its earnings per share would be worth if it traded at a price-earnings ratio of 15, the GF Value Line takes more than price into account when determining value. It also considers a company’s historical price-earnings, price-book, price-sales and price-to-free cash flow ratios, an adjustment factor based on past returns and growth as well as future estimates of the business’ performance.

Using the GF Value Line for Monster Beverage Corp. (MNSTFinancial) as an example, we can see that the stock is considered to be fairly valued. The share price is represented by the blue line, while the solid black line shows the past intrinsic values calculated by the GF Value Line. The dotted portion of the black line illustrates the estimates of future intrinsic value. The red and green bands delineate overvaluation and undervaluation, respectively, with the darker shades indicating more severe deviations from the intrinsic valuation.

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The GuruFocus All-in-One Screener, a Premium feature, found fairly valued companies in the U.S. consumer defensive space that had predictability ranks of at least two out of five stars included PepsiCo Inc. (PEPFinancial), General Mills Inc. (GISFinancial), Tyson Foods Inc. (TSNFinancial) and McCormick & Co. Inc. (MKCFinancial).

PepsiCo

PepsiCo (PEPFinancial), which produces a variety of popular soft drinks and snacks like Lays potato chips, Doritos and Tostitos, has a $206.73 billion market cap; its shares were trading around $149.39 on Friday with a price-earnings ratio of 27.71, a price-book ratio of 14.82 and a price-sales ratio of 2.91.

The GF Value Line suggests the stock is fairly valued currently.

The valuation rank of 3 out of 10, however, leans more toward overvaluation since the share price and price-sales ratio are both approaching 10-year highs.

The Purchase, New York-based company’s financial strength was rated 5 out of 10 by GuruFocus. In addition to adequate interest coverage, PepsiCo is supported by a high Altman Z-Score of 3.72, indicating it is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital surpasses the weighted average cost of capital, implying that the company is able to create value while growing.

The company’s profitability scored an 8 out of 10 rating. Even though the operating margin is declining, the returns on equity, assets and capital are outperforming a majority of competitors. PepsiCo also has a moderate Piotroski F-Score of 5, meaning business conditions are stable, and consistent earnings and revenue growth contributed to a three-star predictability rank. According to GuruFocus, companies with this rank return an average of 8.2% annually over a 10-year period.

Of the gurus invested in PepsiCo, Pioneer Investments (TradesPortfolio) had the largest stake with 0.47% of outstanding shares. Diamond Hill Capital (TradesPortfolio), Yacktman Asset Management (TradesPortfolio) and Ray Dalio (TradesPortfolio) also have significant stakes.

General Mills

Known for breakfast foods like Cheerios cereal and a variety of frozen pastries, pasta, pizza and ice cream, General Mills has a market cap of $36.72 billion; its shares closed at $60.48 on Friday with a price-earnings ratio of 16.02, a price-book ratio of 3.87 and a price-sales ratio of 2.08.

According to the GF Value Line, the stock is fairly valued currently.

The valuation rank of 6 out of 10 supports undervaluation, however, even though the share price and price ratios are closing in on multiyear highs.

The company, which is headquartered in Minneapolis, has a GuruFocus financial strength rating of 4 out of 10. Although General Mills has sufficient interest coverage, the Piotroski F-Score of 2.56 indicates it is under some financial pressure. The ROIC also eclipses the WACC, indicating good value creation.

General Mills’ profitability fared better with a 7 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of industry peers and a high Piotroski F-Score of 8, which means business conditions are healthy. Due to recording consistent earnings and revenue growth, the company has a 2.5-star predictability rank. GuruFocus data shows companies with this rating typically return an average of 7.3% per year.

With a 0.49% stake, Jim Simons (TradesPortfolio)’ Renaissance Technologies is General Mills’ largest guru shareholder. Other top guru investors include Pioneer, Dalio, Mario Gabelli (TradesPortfolio), Mairs and Power (TradesPortfolio), Joel Greenblatt (TradesPortfolio), Ken Fisher (TradesPortfolio) and John Hussman (TradesPortfolio).

Tyson Foods

As one of the world’s largest processors and marketers of chicken, beef and pork products, Tyson Foods (TSNFinancial) stands to benefit from cookouts across the country. Yielding a $26.9 billion market cap, the company’s shares closed at $73.75 on Friday with a price-earnings ratio of 12.45, a price-book ratio of 1.68 and a price-sales ratio of 0.62.

Based on the GF Value Line, the stock appears to be fairly valued currently.

The valuation rank of 7 out of 10 leans more toward undervaluation even though the share price and price-sales ratio are both nearing one-year highs.

GuruFocus rated the Springdale, Arkansas-based company’s financial strength 5 out of 10. Although Tyson has issued approximately $84 million in new long-term debt over the past three years, it is at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 3.19 also indicates it is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC has also historically been higher than the WACC, suggesting good value creation.

Tyson’s profitability fared a bit better, scoring an 8 out of 10 rating. In addition to operating margin expansion, the company is supported by returns that outperform industry peers, consistent earnings and revenue growth, a high Piotroski F-Score of 8 and a four-star business predictability rank. GuruFocus says companies with this rank return, on average, 9.8% annually.

The T Rowe Price Equity Income Fund (TradesPortfolio) had the largest stake in Tyson with 1.18% of outstanding shares. Yacktman Asset Management (TradesPortfolio)’s funds, Simons’ firm, PRIMECAP Management (TradesPortfolio), Pioneer, Tom Gayner (TradesPortfolio), Dalio, NWQ Managers (TradesPortfolio), Jeremy Grantham (TradesPortfolio) and Greenblatt are among its other guru investors.

McCormick

Known for its spices, seasoning and BBQ rubs, McCormick has a market cap of $23.78 billion; its shares were trading around $89.11 on Friday with a price-earnings ratio of 31.41, a price-book ratio of 5.71 and a price-sales ratio of 4.09.

The GF Value Line suggests the stock is fairly valued.

The valuation rank of 2 out of 10, however, is more supportive of overvaluation even though the price-book and price-sales ratios are at one-year lows.

The Baltimore-based company has a GuruFocus financial strength rating of 4 out of 10, driven by sufficient interest coverage. The Altman Z-Score of 2.63, however, indicates it is under some pressure since assets are building up at a faster rate than revenue is growing. The WACC is also eclipsed by the ROIC, suggesting good value creation is occurring.

McCormick has an 8 out of 10 profitability rank, driven by an expanding operating margin, a high Piotroski F-Score of 7 and strong returns that outperform a majority of industry peers. Steady earnings and revenue growth have contributed to a 3.5-star predictability rank. According to GuruFocus, companies with this rank return, on average, 9.3% annually.

With 0.26% of outstanding shares, Pioneer is the company’s largest guru shareholder. Other top guru investors are Simons’ firm, Dalio, Steven Cohen (TradesPortfolio), Tom Russo (TradesPortfolio), Caxton Associates (TradesPortfolio), Paul Tudor Jones (TradesPortfolio), Gabelli and Mairs and Power (TradesPortfolio).

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Forbes

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