Smart Australian investors should look to leverage off areas of high demand growth in the Australian economy and health foods have the twin tailwinds of changing dietary trends and demographics. Population growth will also support consumer demand, which the Victorian government estimates to be growing at 20%-30% per year for organic food alone. Compounded over time this demand shift could make for some big gains for health food oriented investors.
Companies like salmon producer Tassal Group Limited (ASX: TGR) are in pole position; its share price has tripled in under two years year as effective marketing and a growing product mix, including smoked, tinned and fresh salmon contribute to a profit boom. Moreover, the group's decision to focus on the much higher margin (expensive) Australian market saw it grow profits faster than relatively flat revenues on the first half of FY 2014.
The group has invested heavily on improving scalability and operational efficiency in order to generate better returns on equity and capital employed. The next few years are expected to realise the improvement.
The strategy appears to be working with a return on equity of 12.1% for the first half of FY 2014. Based on forecast earnings the price-earnings is 14.7 and with the supply potential to now capitalise on growing demand the future looks bright.
Freedom Foods Group Ltd (ASX: FNP) produces organic foods and is on trend with its range of food products free from gluten, nuts, dairy, yeast, egg or fructose among other things. Popular products include health cereals, seafood, and non-dairy quinoa, rice, soy or almond milk. The group estimates 37% of Australian households have food intolerances and aims to develop its share of this potentially huge market.
Shares have more than tripled in value in the past year and the group's market capitalisation is now $446 million. First half FY 2014 operating net profit was up 98% on the prior corresponding period, with the group intent on further expanding its Freedom Food products range into the lucrative North American market. In the U.S. the gluten-free food market alone is estimated to be worth US$3.4 billion.
Multiple institutional investors have come onboard recently and with the group's products selling in the fast-expanding health food sections of supermarket giants like Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) owned Coles, the future looks good for Freedom Foods.
Almond grower and producer Select Harvests Limited (ASX: SHV) shares have more than doubled in price in the last year and look to have room to run. Higher almond prices driven by a supply and demand curve in the company's favour mean it looks well set for long-term growth. Selling for $6.86 the forward price-earnings is around 11 with a forecast yield of 2.9% for FY 2014 based on analyst forecasts.
Foolish takeaway
Health foods command a premium and therefore can be sensitive to economic cycles, however it appears the sector is amidst an upturn which may be just beginning. The support of changing demographics and dietary patterns also means all three businesses should keep delivering consistently strong profit growth and make for a healthy addition to any portfolio.
