Organic gains: Favorite food stocks

"The organic food industry is surprisingly resilient in an economic downturn," explains Benjamin Shepard, contributing editor with Personal Finance.

He adds, "Mainstream retailers and your corner grocer have been embracing the trend, devoting an ever-growing amount of shelf space to organic foods." Here'sa trio of favorites.

"What was essentially a nascent industry in 1997 with $3.6 billion in sales has exploded to a behemoth with almost $14 billion in sales in 2006, according to the Organic Trade Association.

"And barring a major economic disaster worse than we’ve seen thus far, the industry looks set to continue double-digit growth well into the next decade.

"That’s not to say there aren’t potential troubles ahead as commodity prices continue to soar. Organic farming techniques tend to be more cost intensive--ironically enough--and transport costs continue to swell.

"But so far the industry has been able to pass the bulk of the higher costs onto consumers, and although sales volumes have dropped off and profits are down, those consumers are as dedicated as ever.

"The best way to tap into the organic foods trend is through manufacturers and suppliers with global customer bases, as well as more diversified purveyors.

"The Hain Celestial Group (NASDAQ: HAIN) manufacturers and distributes some of the best-known natural and organic products, such as Arrowhead Mills flour and baking goods as well Rice Dreamand Soy Dream non-dairy milk products.

"Largely because of increased consumer interest in leading healthier lifestyles and Hain’s dominate market position, sales have been growing at an almost 18% pace on a compounded annual basis over the past five years. 

"The company also offered the added benefit of a strong presence in the European markets, where organic foods are even more popular. To further tap into the solid reputation in the industry, the company is scheduled to launch almost 50 new products just this summer.

"Despite its strengths, the company’s balance sheet has been rather ugly over the past few quarters, partly because of higher commodities costs, though primarily due to an aggressive acquisition strategy.

"Those factors have left the company’s price-to-sales ratio at 0.9 and price-to-book at 1.3, creating extremely favorable valuations for new investors.

"United Natural Foods (NASDAQ: UNFI) is the largest wholesale distributor of organic products in the nation, with 10 hubs serving the US and Canada.

"It’s also broadly recognized for its environmental efforts, building 'green' distribution centers and taking steps to reduce its carbon footprint. Plus, as a distributor of high demand and fairly unique products, it meets less resistance passing higher prices further down the supply chain.

""The company’s five-year sales growth has been clocking at better than 18%, with earnings per share coming in at better than 21%. Despite the growth, shares have sold off of late after a somewhat disappointing third quarter. 

"That was the result of its recent acquisition of fellow distributor Millbrook, a move that allowed United to expand its customer base in traditional supermarkets and should prove to be a long-term advantage. Based on its long-term growth prospects, United Natural Foods is a buy.

"Kraft Foods (NYSE: KFT) is a more diversified play on the organic foods market. Over the past few years, the company has been expanding its organic options, marketing coffees, cereals and cookies under the organic label. 

"Their Boca Foods Company subsidiary has also been enjoying wide success with its line of soy-based burger and sausage products, as well as prepared meals, as it makes inroads not only with vegetarians, but also people looking to eat healthier.

"Although sales of organic products accounts for less than 6% of sales, its line of offerings is expected to grow over coming years as the company continues to tap into the organics market. 

"There’s also a degree of downside protection given its more diversified product lines because of the staple status of many of its products. 

"Profits are down because of higher commodities costs. But sales have been rising, partly because of the slowing economy, but also because consumers are choosing to eat at home rather than going out.

"And in the last quarter, Kraft was able to increase prices on 90% of its products to help absorb higher input costs. With a yield of 3.6% and a growing line of organic products, Kraft is a buy."