Flower Foods, Ingredion, and McCormick: 3 Food Companies for Your Watch List

When contemplating investment ideas you may want to look toward an industry that makes and sells things necessary for living, such as food and ingredients that go into food production. Bakery company Flowers Foods , food ingredient company Ingredion , and spice and flavoring company McCormick are good examples of such companies. While this industry remains relatively immune to obsolescence compared to the tech sector, these companies can face challenges, which is why it's important to explore their strategies and fundamentals.

Breaking bread
Flowers Foods manufacturers and sells bakery items such as bread, buns, snack cakes, and tortillas under brand names you may recognize such as Nature's Own, Whitewheat, and Cobblestone Mill. In its 10-K Flowers Foods highlights a five pronged approach to gaining an advantage in the marketplace: growing sales via acquisitions and geographic expansion, improving efficiency, enhancing quality of its products while lowering costs, giving good service, and treating employees well via career promotion. It pays for an investor to look at a company's financials to see if it measures up to what executives say.

Flowers Foods products reach 79% of the population, meaning it's a market leader. In 2013, Flowers Foods increased revenue, net income, and free cash flow 23%, 70%, and 15%, respectively. Volume gains from acquisitions contributed to these increases, which is something to keep in mind since it's always preferable that sales gains come from internal growth in an investment. Flowers Foods could stand to conserve more cash--at the end of 2013, Flowers Foods only possessed $8.5 million in cash or less than 1% of stockholder's equity. Flowers Foods long-term debt to equity ratio resides in the steep range at 86%. However, operating income more than adequately covers interest expense with a times interest earned ratio of 26. Low cash on the balance sheet casts doubt on its dividend sustainability. However, Flowers Foods only paid out 54% of its free cash flow in dividends last year. Currently the company pays its shareholders $0.45 per share per year and yields 2.4% annually.

Ingredients of Ingredion
Ingredion sells ingredients such as sweeteners, and chemicals that determine texture in food and medical products. Unfortunately 2013 didn't go so well for Ingredion. While Ingredion sells needed ingredients for crucial products such as food and animal feed, those same products are subject to global commodity price fluctuations and geopolitical risk. Economic conditions affected Ingredion's sales in places like Mexico, Argentina, and Brazil. Currency devaluations helped serve as a double whammy in places like Brazil and Argentina.

Ingredion's revenue, net income, and free cash flow all declined 3%, 7%, and 24%, respectively. On Ingredion's balance sheet, cash and long-term debt to equity registers at 24% and 71%, respectively, with operating income exceeding interest expense by nine times. Despite its troubles Ingredion boosted its dividend by 60%, perhaps due to long-term faith in the company by management. Last year Ingredion paid out 35% of its free cash flow in dividends. Currently the company pays its shareholders $1.68 per share per year and yields 2.7%.

Spicing up your portfolio
McCormick sells your favorite spices and gravy mixes. The company caters both to the individual consumer and the industrial restaurant segment. Last year McCormick increased revenue 3%, with net income declining 5%. McCormick's free cash flow increased 6% during that time due to lower capital expenditures. According to McCormick's earnings release, over half of the revenue increase stemmed from the company's acquisition of the Chinese condiment business Wuhan Asia Pacific Condiments. New products, price increases, and marketing also contributed to sales increases.

Increased marketing and retirement expense contributed to the decline in net income. Weakness in McCormick's industrial segment stemming from lower restaurant traffic in the Americas served as a drag on top line growth. Lower capital expenditures contributed to an increase in free cash flow. Cash and long-term debt stand at 3% and 52% of McCormick's stockholder's equity, respectively. Its operating income exceeded interest expense by 10 times. In 2013, McCormick paid out 49% of its free cash flow in dividends. Currently, the company pays its shareholders $1.48 per share per year in dividends and yields 2.3%.

Foolish takeaway
Flowers Foods' purchase of former Hostess assets such as Wonder Bread, along with the internal growth of well-known brands such as Nature's Own bread, will probably translate into long-term capital gains and dividend increases. Company executives believe Flowers Foods' revenue will increase 6%-10% in 2014. Prospects remain dim for Ingredion in the short to medium term as management believes that low sugar prices and currency headwinds in Argentina will continue. Businessweek anticipates a 3% revenue decline for Ingredion in 2014. Future growth for McCormick will come from product innovation, and geographical expansion in places like China, Europe, the Middle East, and Africa. McCormick's management believes it can grow revenue 3%-5% in 2014. All three of these companies deserve more of your research time and a place on your Motley Fool Watch List.

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The article Flower Foods, Ingredion, and McCormick: 3 Food Companies for Your Watch List originally appeared on Fool.com.

William Bias has no position in any stocks mentioned. The Motley Fool recommends Flowers Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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