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Junk Food Cravings Make Feast for Investors

14 July 2015 in Trading Ideas

Health food may be booming, but that does not mean salt and fat no longer stand a chance maintaining their rightful places in the American diet.

Consider the earnings report delivered last week by PepsiCo, which raised its full-year earnings expectations after delivering a second-quarter profit that topped analysts’ expectations.1

While the company has faced some headwinds — namely, a stronger dollar hurting overseas sales as well as a domestic trend away from the company’s signature sugary soda—Pepsi’s ace in the hole has been its Frito-Lay snack division, which was responsible for more than $1 billion of the company’s overall $3.05 billion in operating profit.

As the Dallas Business Journal pointed out, demand for snacks is increasing, so Frito-Lay’s contribution is expected to rise. While the company still delivers favorites such as Cheetos and Doritos, it has diversified its portfolio to include healthier options such as Stacy’s pita chips, Oven Baked chips and Smartfood Popcorn, appealing to a wider market.2

But it’s not just the healthy choices that are making an impact. Bloomberg reported that the Frito-Lay North America business has built on popular brands like Doritos, adding a line called Doritos Roulette, which features the occasional spicy chip mixed in with its classic nacho-cheese flavor. The unit’s net sales gained 1.9 percent in the quarter.3

Buoyed by its earnings performance, shares of Pepsi have already gained more than 4 percent in July.

Pepsi accounts for 18 percent of the Junk Foods motif, which has gained 2.8 percent in the past month. During that same time, the Standard & Poor’s 500 has increased 0.3 percent. Over the last 12 months, the motif has risen 11.9 percent. The S&P 500 is up 6.9 percent.

The stocks of many fast-food purveyors have also been outperforming the group that was expected to bring their ultimate downfall, which Yahoo Finance calls “fast casual” restaurants.4

Fast casual became the trendy buzz phrase for new restaurant stocks a couple of years ago, as young, regional chains tried their respective hands at becoming “the next Chipotle.”

As Yahoo Finance explained, what Chipotle did for Mexican food — using fresh, organic ingredients and making food to order — Noodles & Co. was going to do for pasta and Asian noodles, El Pollo Loco Holdings Inc. for rotisserie chicken, The Habit Restaurants for burgers and Zoe’s Kitchen for Mediterranean fare.

Each of these upstarts completed an initial public offering between June 2013 and November 2014, and each was greeted by voracious investor demand that drove their stocks up between 60 percent and 104 percent on their first day of trading. These instant price premiums inflated the valuations and lifted expectations for how fast the companies would have to grow to satisfy the Street.

Meanwhile, good old fast-food stocks have performed relatively well over the past six months—especially those chains that cater to the young drive-through crowd and are unabashed about offering fun, indulgent, not-so-healthy food, Yahoo Finance noted.

Slightly higher wages and the past year’s drop in gas prices have been a boon to established quick-serve chains, which already had their store networks built out, branding campaigns top of mind and business models long in place.

These include Jack in the Box (up 53.4 percent in the past 12 months), Sonic (up 29 percent) and Taco Bell/KFC/Pizza Hut parent Yum Brands (up 8.5 percent).

That’s not to say that a health-conscious move by consumers isn’t afoot, or that fast-food restaurants don’t want a piece of that market. But many junk-food vendors have appeared to succeed by not forgetting their roots.

1 Pan Yuk, Pan and Lindsay Whipp, Lindsay, “PepsiCo Drinks and Snack Sales Rise in North America, Financial Times, July 9, 2015.

2 Kezar, Korri. “Frito-Lay Chips In a Third of PepsiCo’s $3.05 Billion Q2 Profit,” Dallas Business Journal, July 9, 2015.

3 Orland, Kevin, “PepsiCo Profit Tops Estimates on North American Snack Gains, Bloomberg News, July 9, 2015.

4 Santoli, Michael, “Investors Skip Trendy ‘Fast Casual’ Chains, Flock to Old Fast-Food Stocks,” Yahoo Finance, May 15, 2015.

Tags: Junk foods