Fitch offers look forward with four national business sectors

Fitch, the Chicago-based ratings agency, issued reports Tuesday (Nov. 18) on four national business sectors that are important to the Fort Smith region. Link here for the full reports.

Following is a summary of Fitch’s comments on each sector.

U.S. Packaged Foods
Fitch sees stability in the sector despite the weak economy.

“The advantages gained in the weak economy are likely to outweigh the drawbacks for United States-based investment grade packaged food companies in 2009. The recent inclination for consumers to eat at home more often is positive for these companies. Packaged foods are a good value, even with recent price increases.”

“Fully offsetting incremental cost inflation in 2009 will be difficult to achieve because of the magnitude of pricing actions already taken in 2008, pushback from retailers about further increases, and consumers’ increased desire to switch to private label products to reduce their grocery bill.”

Major companies in the sector and associated Fitch rating:
Campbell Soup Co. (‘A’; Outlook Stable);
ConAgra Foods, Inc. (‘BBB’; Outlook Stable);
Flowers Foods, Inc. (‘BBB’; Outlook Stable);
General Mills, Inc. (‘BBB+’; Outlook Stable);
Kellogg Company (‘A-‘; Outlook Stable);
Kraft Foods, Inc. (‘BBB’; Outlook Stable);
Sara Lee Corp. (‘BBB’; Outlook Stable).

U.S. Commodity Food
Companies in this sector will need credit support or good cash reserves to survive.

“Despite declining energy and agricultural ingredient costs, high financial leverage and weak cash flow generation continue to wreak havoc on the commodity food industry.”

“The well-anticipated bankruptcy filing by poultry processor Pilgrim’s Pride Corp. (Pilgrim’s) and the potential inability of fresh produce manufacturer Dole Food Co. (Dole) to refinance significant near-term maturities illustrate the challenges faced by a low-margin highly levered food company in a difficult operating environment.”

“Tyson is currently benefiting from the diversification provided by its pork and beef business but continued deterioration in the profitability of its core chicken business is a concern. Ratings could be downgraded if the company’s acquisition strategy becomes increasingly aggressive, leverage increases more than anticipated or liquidity becomes an issue. Tyson’s nearest material maturity is in early 2010.”

Major companies in the sector and associated Fitch rating:
Tyson Foods, Inc. (‘BB+’; Outlook Negative);
Hormel Foods Corp. (‘A’; Outlook Stable);
Dole Food Co. Inc. (‘B-‘; Watch Negative);
Del Monte Foods Co. (‘BB’; Outlook Stable).

U.S. Agribusiness
Fitch sees diversification and improved liquidity providing a stable outlook.

“The ratings of U.S. agribusiness companies are likely to remain stable in 2009 due to their well-diversified product lines and geographic footprints. Diversification tempers the severity of earnings volatility. Internally generated liquidity and cash flow for agribusiness companies have improved dramatically during the past few months as agricultural commodity prices tumbled from their peaks in mid-year 2008.”

“Earnings in certain sub-segments of agribusiness companies may be pressured in 2009. Global demand has diminished with weak economic conditions and U.S. protein meal demand is expected to slow with cutbacks in meat production. Ethanol production is suffering from weak margins due to overcapacity as well as a sharp decline in gasoline prices, which reduces ethanol’s value as a gasoline blendstock.”

Major companies in the sector and associated Fitch rating:
Archer Daniels Midland Company (‘A’; Outlook Stable);
Bunge Limited (‘BBB’; Outlook Stable);
Cargill, Incorporated (‘A’; Outlook Stable);
Corn Products International, Inc. (‘BBB’; Outlook Stable).

U.S. Restaurants
Fitch sees a tough 2009 for the restaurant sector.

“Fitch Ratings expects the negative effects of a declining U.S. economy, growing pressure on consumer discretionary spending, and higher than normal food costs to be further magnified in the restaurant industry during 2009.”

“Fitch views the quick service restaurant (fast food companies) segment as better positioned to withstand the current economic stress and market turndown because of its value perception, lower priced menu items, and continued consumer trade-down from full-service dining establishments.”

“Concepts that are leaders within their categories, such as Olive Garden and Red Lobster, and those that have a strong consumer followings or brand equities, such as Chili’s and Applebee’s, are likely to benefit.”

Major companies in the sector and associated Fitch rating:
McDonald’s Corporation (‘A’; Outlook Stable);
YUM! Brands Inc., (‘BBB-‘; Outlook Stable);
Burger King Corporation (‘BB’; Outlook Positive);
Darden Restaurants Inc. (‘BBB’; Outlook Negative);
Brinker International, Inc. (‘BBB-‘; Outlook Negative).