Sector Watch: Five Stocks To Help You Fight Food Inflation Pain

Unless you've stocked up on enough food to hold you through next year, you won't be able to avoid the effects of food inflation.

According to the U.S. consumer price index, overall food prices rose 4.7% in September from the year before. That's more than the 4.6% increase in August and 4.2% jump in July.

And the price pain will continue.

Global food prices are expected to increase 4% next year, and could climb even higher on supply squeezes. Droughts and floods have disrupted global crop yields, meaning higher prices at both grocery stores and restaurants.

Food at home prices rose 6.2% in September from the previous year. Grocery stores were eating most of the price increases earlier in the year, somewhat insulating U.S. consumers, but recently that's begun to change.

"The era of grocers holding the line on retail-food cost increases is basically over," John Anderson, a senior economist at the Farm Bureau in Washington, told Bloomberg News.

Food away from home didn't rise as high as food at home, up a more modest 2.6%. That's the widest gap between the two price measures since 1990.

The faster rise in grocery store prices has led some restaurants to start boosting prices to catch up. They think consumers are less likely to be deterred by increases now that food at home costs more, too.

"If people go to the supermarket and see that the core items they're purchasing are on the rise, then they are less likely to be surprised if restaurants are raising prices as well," Jeffrey Bernstein, an analyst with Barclays Capital, told Bloomberg.

Many chains have tried to avoid changes, but the third-quarter's 8% surge in commodity prices has pushed some to their breaking point. Now popular eateries like McDonald's Corp. (NYSE: MCD) and Panera Bread Co. (Nasdaq: PNRA), which have already adjusted their menu prices this year, are considering more price hikes.

Since food companies and restaurants are charging more for their products, brands that are consumers' favorites are raking in profits. Higher prices have boosted the Consumer Staples Select Sect. SPDR exchange-traded fund (NYSEARCA: XLP) about 15% in the past two years, while the Standard & Poor's Supercomposite Restaurants Index has soared 64%.

This means now's the time for you to offset your bloated food budgets by hunting for the sector's most successful stocks.

Five Food Inflation Investments

Here are five food-related stocks positioned to grow along with food prices:

• Kraft Foods Inc. (NYSE: KFT) – Kraft's wide variety of food products has been incredibly appealing to money-saving consumers. Analysts expect it to do well among shoppers who remain committed to cost cutting at the grocery store. Kraft's net revenue last quarter rose 11.5% to $13.2 billion as it successfully raised prices to offset input costs. Kraft's $1.16 dividend gives it a 3.3% yield. Citigroup Inc. (NYSE: C) analysts gave it a price target of $42 – about a 19% premium to yesterday's (Monday's) $35.41 closing price.

  "Over the past 12 weeks, Kraft has seen retail strength out of dry dinner, lunch meat and cookies," Citigroup said. "As consumers cut out-to-eat spending and cook more meals at home, Kraft stands to benefit."

• General Mills Inc. (NYSE: GIS) – As one of the world's biggest food companies, General Mills is behind such popular brands like Pillsbury, Yoplait, Cheerios, Green Giant, Hamburger Helper, and Betty Crocker. Its variety appeals to consumers on a budget as well as healthy shoppers. General Mills raised prices last quarter and saw sales rise 9% to $3.85 billion, beating estimates while rival ConAgra Foods Inc. (NYSE: CAG) missed expectations. General Mills has a 3.3% yield, and analysts give it a one-year price target of $42 – a 7% premium to yesterday's $39.28 closing price.

  "General Mills operates with a stronger brand portfolio than ConAgra," said Morningstar Inc. (Nasdaq: MORN) analyst Erin Lash. "That's one of the things that we think serves General Mills well and will continue to serve them well in this tough consumer environment."

• PepsiCo Inc. (NYSE: PEP) – PepsiCo has been steadily increasing earnings for five straight quarters, with an average 1.7% increase in net income and 26.2% revenue growth. It raised prices for its snacks and beverages this year, which helped revenue grow 13% last quarter. It's also profiting from a bet on emerging markets. PepsiCo last year announced a $2.5 billion investment in facilities in China, and has started a push to market healthier snack foods in India. Its stock has a one-year price target of $71, a 13% premium to yesterday's $62.81 closing price.
• Panera Bread Co. (Nasdaq: PNRA) – Panera continues to reign as a favorite among "fast casual" eateries. It has raised prices about 2.5% so far this year, and saw sales climb 4.4% in the quarter ended Sept. 30. Panera is still considered an affordable dining out experience, and it offers healthy menu options that don't skimp on taste. Panera's third-quarter revenue jumped 22% to $453 million. Panera estimates 15% to 17% earnings per share growth in the fiscal fourth quarter to $1.39 to $1.41 per share. Deutsche Bank AG (NYSE: DB) analysts gave it a $150 price target – 11% higher than yesterday's $135.31 closing price.
• Chipotle Mexican Grill Inc. (NYSE: CMG) – Another favorite in the casual dining group, Chipotle is already up a whopping 54% this year. Third-quarter earnings were up 25% from last year's third quarter, and comparable store sales rose 11.3% due to higher menu prices and store traffic. The chain raised prices 3.5% last quarter with more price hikes planned this year. Its popularity with consumers who still want to dine out without splurging will support its earnings and share price going forward. Earnings per share are $6.42, with Wall Street projecting 23% EPS growth over the next five years. Chipotle closed yesterday at $327.03, bringing its total gain this year to 54%.

News and Related Story Links:

• Bloomberg News:
  Get Ready for Higher Restaurant Prices
• Bloomberg News:
  Drought-Damaged U.S. Corn Crop Pressuring Global Food Supply
• Money Morning:
  Kraft Foods Inc.'s (NYSE: KFT) Spin-off Strategy Will Unlock Value for Investors
• Forbes:
  Pepsi Bubblin' Up To $71 With Tasty Push From Frito-Lay
• The New York Times:
  General Mills Earnings Beat Expectations
• Trefis:
  Marketing Push and New Products Drive Kraft’s Growth
• Yahoo! Finance:
  Chipotle Tops Estimates
• Nasdaq:
  Poverty On The Rise: Citigroup Thinks These 9 Low-End Consumer Stocks Will Benefit