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Manufacturing index at a 3-year high with food and beverages leading the way

The Australian Industry Group released its monthly Performance of Manufacturing Index (PMI) report, revealing that manufacturing has risen for eight months, and is now at three-year highs with overall manufacturing in expansion. Leading the way is the food, beverage and tobacco sub-sector with a reading of 65.6. A reading of below 50 means an industry is contracting, and above 50 indicates expansion.

At the other end of the spectrum was machinery, metal products and textiles — all way below 50 in contraction. New orders were trending up, but respondents to the survey thought that it was less of expansion and more of customers catching up with orders that have been put off until now.

Exports have risen slightly, yet are still constrained by the high Aussie dollar, which makes exported goods comparatively higher priced. Supply deliveries were up were compared to last month, but similar to the new orders that resulted from delayed ordering, inventory stocks are found to be actually lower.

Selling prices have been improving since early 2013, but are still in contraction territory. Wages are still expanding and manufacturing input prices are expanding even more. That means higher production costs for fewer products sold, which can only point to profit margin contraction.

Using this report as a guide for stock research, here are three companies in the food, beverage and tobacco industries to watch.

Webster (ASX: WBA) produces mostly onions and walnuts that are exported to Northern Hemisphere buyers for counter-seasonal food supply.  It has a net profit margin of 13.5% and has increased net profit after tax (NPAT) from $4 million to $6.97 million in 2013. Its share price has risen from $0.40 to $0.95 over the past two years. Despite the high Aussie dollar, it is still making a profit and has less than 1% debt. Its book value is $0.77 a share, making its share price-to-book value ratio 1.23.

Australia’s largest grain producer, Graincorp (ASX: GNC), supplies both domestic and international markets with wheat, barley and canola as its core commodities. It is currently under a takeover bid from US-based Archer Daniels Midland (NYSE: ADM). When the bid was announced, its share price jumped from $9 to about $12.

The two companies are waiting for a final ruling to come from Federal Treasurer Joe Hockey, scheduled to be announced in December. As reported previously, international food companies have been making takeover offers to secure high quality food supplies, and some domestic producers are needing injections of investment capital or business partnerships to remain financially strong.

Another large-scale producer is Coca-Cola Amatil (ASX: CCL), principal licensee for the world famous soft drink in Australia with operations in Indonesia, New Zealand, Papua New Guinea and Fiji. In 2013, it increased its NPAT by 5% from $532 million to $558 million, keeping in line with its 5.51% average annual earnings per share growth over the past five years.

Although it is in a mature industry, it still achieves a net profit margin of 10.9% and its return on equity is 26.9%. It also distributes alcoholic beverages like Jim Beam, Canadian Club and Makers Mark.

Foolish takeaway

Until a more sustained economic recovery takes place, the early gains of the food and beverage industry seem intuitively correct. In down times, people still eat and drink, and when they have more income they increase their intake and switch to superior quality products. Coca-Cola has been selling brown fizzy water for over 100 years now, and it’s still as popular as ever.

Sometimes the easiest things can make you the most over the long run. Don’t discount producers of this sort because demand is still the name of the game, and if people want it and need it badly enough, there’s a profit to be made.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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