Is It Over for Snacks and Candy?

Earlier this week, we saw the announcement of the acquisition of snack food giant Kellanova (NYSE: K) by global candy giant Mars, Incorporated.

You may not be familiar with Kellanova, which was only created as a stand-alone public company a little more than a year ago. Previously, it was known as Kellogg Corporation.

Even if you have yet to hear of the company, we are sure you are familiar with their products.

They own consumer brands such as Pringles, Cheez-It, Pop-Tarts, Eggo waffles, Rice Krispies Treats, and many others.

The acquisition got us thinking about a note we wrote almost exactly one year ago.

At that time, food, beverage, and restaurant stocks were all being hammered because investors were considering the impact of the new GLP-1 weight loss drugs.

We were interested in the subject and dug into the numbers. Our conclusion?

The market was completely wrong. This was the first time anyone had done the math on the impact based on the actual sales and market for these products.

With this big acquisition happening this week – and the market still being SO wrong – we thought we would share the note again.

Have a good weekend!

When you hear talk about the history of the Internet, you might instantly think of the last, frantic gasp of the dot-com bubble in 1999 and 2000 before the burst... but there were plenty of interesting Internet-related movements in the market prior to that date.

My career in Wall Street started in the mid-1990s, and one of the days I remember well was Yahoo's initial public offering ("IPO") in April 1996.

The IPO itself was exciting. Yahoo was one of the first pure-play Internet companies to go public. On its first day of trading, the stock exploded 270% from the IPO price.

That might not sound unusual to us now, given some of the overhyped IPOs we've seen in recent years, but back then, it had almost never happened before.

What was equally interesting as the price action around Yahoo, though, was what happened to other stocks.

There were only so many publicly traded companies to go long on the Internet. However, there were many ways to predict how it would harm other industries.

One of those groups was newspapers.

Personally, I have always been a fan of both newspapers and stocks. When I was younger, I remember buying two or three newspapers daily and reading them cover to cover. I was also the editor-in-chief of the second-largest newspaper at the University of Pennsylvania.

Within a few months of the Yahoo IPO, the newspaper stocks were destroyed.

The talking heads and analysts all loudly proclaimed that the Internet would be the death of the newspapers.

Why would you pay for news when you could get it for free?

The analysts – and the panicked sellers – weren't entirely wrong (eventually).

The issue was that the outcome they accurately predicted wouldn't happen for more than a decade.

While some free news was available on the Internet, there was no real revenue to support any material amount of information since this was before online advertising really took off.

Additionally, the only place you could access the Internet was your computer. Back in 1996, the Motorola StarTAC was the cutting edge of phone technology—and you weren't reading online news about it!

Eventually, we would all have mobile phones with data and be able to access the Internet anywhere. This would lead to a lot more eyeballs, a lot more advertising, and then a lot more "free" news online.

However, all of that didn't happen for another 15-plus years... So, newspapers still made for some great stocks across the period. I should know – I made money on them myself!

I mention this story because we're seeing something similar happening right now with excitement about diabetes and "miracle" weight-loss drugs called GLP-1 agonists.

GLP stands for "glucagon-like peptide," which was developed relatively recently—initially to help diabetics.

They mimic the action of a hormone called glucagon-like peptide 1. When blood sugar levels start to rise after someone eats, these drugs stimulate the body to produce more insulin, which helps lower blood sugar levels.

This is obviously helpful for diabetics in managing their blood sugar levels, but it turns out it has an additional impact on weight loss.

The effect of lower blood sugar levels is that you have less actual appetite. Less food means fewer calories... and net-net, the GLP-1s have led to large weight loss for folks who use them.

While these drugs showed impressive results with diabetics, the add-on impact of driving down appetite and thereby promoting weight loss has driven a huge amount of interest in the drugs recently.

Just think about how many folks would love to lose weight and just take a drug to do it... No exercise, no calorie counting.

This is great for humanity... but not so great for food companies – especially ones selling candy and snacks, right?

The recent success—and especially the publicity—behind these weight-loss drugs has resulted in many food and restaurant stocks being crushed in recent months.

Concern about the effect of these drugs has reduced the market cap of many of these winning companies by a quarter or more in the past few months.

Does the success of these drugs mean that a company is worth 25% less – either now or in the future?

This is where it's interesting to dig a little further...

The first point to understand is that while these drugs are beneficial, there are some drawbacks.

Right now, the drugs are injected. Eventually, they will be available in pill form, which will take time.

If a patient stops using the drugs, then they lose the benefits very quickly. This is a much bigger deal for patients.

With these drugs being relatively new, we also don't know the full extent of the potential side effects. There have been many times in the past when new drugs with great benefits emerged... but eventually, side effects are detected that make the drugs non-viable.

Now, I'm not saying this will happen with these weight-loss drugs (I don't think it will), but it's something to keep in mind.

The other major issue with the drugs is the cost. Most of these aren't currently covered by insurance, and the cost to the user is upward of $1,000 per month, which means a high cost of about $12,000 annually.

Like other successful drugs, the eventual benefits could lead to price decreases. However, this process could take years.

Let's also consider some basic math on the drugs...

There are about 260 million adults in the U.S. today. According to recent survey data from health policy research organization KFF, about 50% of respondents have heard about these drugs and might be interested.

But the reality is that doctors will only write so many prescriptions.

According to a recent Morgan Stanley (MS) report, analysts thought the total U.S. market for these drugs could be nearly 25 million people by 2035. That's about 10% of the adult population and about 7% of the total population.

Take a step back and realize this is a fantastic number. The most prescribed drug in the U.S. is the generic version of Lipitor called atorvastatin (I take it), and it has about 25 million users today.

What would these weight-loss drugs becoming the most successful drugs of all time mean?

The initial results show that patients drop their caloric intake by 25% to 30% once they start taking these drugs.

If 10% of the population reduced their caloric consumption by 30%, that would mean a 3% drop in total caloric consumption.

The stock market has extrapolated that this would hurt companies that make unhealthy food, like chocolate, potato chips, and hamburgers.

However, there isn't evidence that these drugs make people want to eat healthier. They just want to eat less.

If something like this happened, you could see growth in the unhealthy areas.

But take another big step back and think about these numbers...

We're talking about a 3% reduction in the end market a decade from now. There are also a ton of "ifs" about safety, insurance, etc.

Is this "risk" worth a quarter of the market cap of food and restaurant companies?

We don’t think so. We believe it is creating an opportunity for investors, and apparently, Mars Corporation agrees with us!