Hobson: Distressing State for Suppliers of Food

THE WEEK: Food suppliers are stuck between a rock and a hard place, while BP for once has some news to cheers, says Morningstar columnist Rodney Hobson

Rodney Hobson 16 January, 2015 | 12:13PM
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Starving to Death

Our determination to demand cheaper food from supermarkets is having a chain effect that is causing severe pain among suppliers. Do not assume that only the smallest ones at the start of the food chain are suffering.

Premier Foods (PFD) earned a load of opprobrium just before Christmas by trying to force its suppliers to pay for the privilege of staying on its books. Surely, the press argued, Premier should be paying the suppliers, not the other way round.

This cry of outrage rather took away attention from the fact that this is common practice among supermarkets and their suppliers. It is quite normal for supermarkets to demand that suppliers pay for shelf space or contribute to advertising and special promotions. Such demands are inevitably pushed down the line.

Given the intense competition among supermarkets, this habit will not disappear. The message for food suppliers is potentially dire. Shares in Premier Foods itself are down to less than a quarter of their level 12 months ago. Investors are right to stay well clear.

This week Associated British Foods (ABF) reported sales up just 1% in the 16 weeks to 3 Jan. Since clothing discount retailer Primark was 12% ahead, the food side was clearly well down. In particular, the sugar operations, accounting for a fifth of group revenue, continue to struggle and two factories are to be closed due to being uneconomic.

ABF shares have done remarkably well, rising from £8 five years ago to four times that level this year but they are coming off the boil. Primark, the big success story, now accounts for half of all sales, which is good news, but its remarkable sales growth is inevitably slowing and it should not have to bolster the food side for ever.

The trading statement warned that profits and earnings per share are likely to be marginally lower for the current financial year to next September. If you have doubts, as I have, this could be a good time to take profits.

Begbies Traynor (BEG) – if you’ve never heard of them it’s because you’ve never gone bust – is one of the biggest names among insolvency experts. Begbies talks of “shocking increases in distress” in the food sector, an inevitable outcome from the “aggressive supermarket price war”. You have been warned.

Oil on Troubled Waters

I have poured cold water on BP (BP.) ever since the Gulf of Mexico oil spill in 2010 and suggested that investors should cut their losses on any share price increase given the number of setbacks the oil giant has faced battling its way through US courts.

So for once let me pour a little oil on troubled waters. A court in Louisiana, where anti-BP feeling has been whipped up in the past, has ruled that 3.19 million barrels of oil were discharged into the Gulf of Mexico. Since previous estimates put the spill at 4.1 million, the fine likely to be imposed on BP should be reduced by about £3 billion. That’s the first bit of good news to hit BP for the past five years.

BP shares have suffered alongside other oil-related stocks as the price of crude has plummeted but at the current level of just over £4, I withdraw my longstanding view that the shares should be avoided – at least no more than any other oil stocks. Morningstar values BP’s intrinsic worth at £5.75, earning the stock a 5-star rating.

Retail Heaven

It’s a pleasure to report a success story in the embattled retail sector, so full marks to JD Sports (JD.), where shares have been edging remorselessly higher since a four-for-one share split in June.

JD says sales were up 12% on a like-for-like basis in the crucial Christmas period, continuing the sales rise seen in the current year that began last February. Profits will therefore beat the most optimistic forecast of £90 million. The shares are not cheap but if you are already in, well done and stick with it.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Associated British Foods PLC2,018.00 GBX0.80Rating
Begbies Traynor Group PLC118.60 GBX-1.17
BP PLC392.50 GBX-0.41Rating
JD Sports Fashion PLC187.00 GBX1.63
Premier Foods PLC114.40 GBX-1.89

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.