Recession or not, we all need to eat. The food industry should be one place I would expect to find solid balance sheets and consistent operating performance in an uncertain economic environment.

I screened 14 food, beverage and confectionary stocks using the Company Stock Risk Profile Fast Track. Here’s what I found:

The industry has a lot of financial leverage. Long-term debt as a percentage of total capital averaged 38.2 percent for all 14 companies. Only three companies were below 20 percent - the Company Stock Risk Profile’s definition of low long-term debt – Coca-Cola, Pepsico and Diamond Foods. Heinz and Hershey were at the high end with 70.4 percent and 68.3 percent, respectively.

This is not a consistently cash-rich industry. Free cash flow at as many as six companies was not stable and declining.

Eight companies reported disappointing earnings as compared with Wall Street expectations in at least one quarter in the latest four quarters. Street analysts have lowered earnings estimates at only two companies. Are these analysts too optimistic?

Valuation is a mixed picture. Eleven stocks had price/earning ratios (using trailing 12-month earnings) below the average of the high and low P/Es for the last five years. But based on the projected earnings growth rate (PEG), 12 stocks were overvalued relative to the industry and/or Standard & Poor’s 500.

Managements have not demonstrated enthusiasm for their stocks. Kraft was the only company where management had purchased their company’s stock.

Wall Street, on balance, likes this group. There were eight stocks where more than half the analysts following them were recommending buy. The Company Stock Risk Profile and Fast Track favor stocks where less than half the analysts are recommending purchase, leaving plenty of room for ratings upgrades.

Only two stocks had both low long-term debt and stable or growing free cash flow—Coca-Cola and Pepsico. And Coca-Cola was the only stock that failed only three of the 10 Fast Track categories, leading me to take a closer look.

Coca-Cola’s Company Stock Risk Profile rating turned out to be Medium Risk. While the company’s fundamentals are solid, two variables raised the stock’s Risk Profile. Failing eight of 12 valuation measures, the stock is far from cheap. And Wall Street is extremely bullish with 14 of the 16 analysts following the stock recommending purchase. I passed on Coca-Cola in March 2005 when the stock was $43 based on valuation.

The stock I find most intriguing is Kraft. Although the stock failed four of the 10 Fast Track categories, I broke my three-category rule and put the stock through the complete Company Stock Risk Profile research process. Kraft is a turnaround story, so I wasn’t surprised the Risk Profile rating was Medium. Here’s what caught my interest:

1. Kraft is one of the world’s leading food and beverage companies with such well-known and established brands as Philadelphia cream cheese, Oscar Mayer, Post cereals, Nabisco, and Kraft.

2. Kraft has new top management. Irene Rosenfeld became chief executive officer in June 2006 and also was named chairman in March 2007 following Altria’s spin-off of Kraft. Rosenfeld is a 25-year industry veteran, and came back to Kraft from Pepsico’s Frito-Lay where she was chairman and CEO since 2004.

3. The company generated cash flow from operations of $3.6 billion last year and, after capital expenditures, free cash flow of $2.3 billion.

4. Insiders purchased stock this past February.

5. Kraft has yet to gain support on the Street. Only four of the 18 analysts following the stock are recommending buy.

6. Warren Buffett’s Berkshire Hathaway owns 132.4 million shares or 8.6 percent of the outstanding shares.

There also are a couple of negative factors to consider:

1. Management’s strategy to accelerate growth and cut costs has yet to prove successful, although top line growth is beginning to pick up.

2. The shares are not a bargain, having failed seven of 12 valuation measures.

Because most Wall Street analysts probably have low expectations, Kraft is positioned to surprise on the upside if management’s strategy continues to move in the right direction. But the stock doesn’t yet offer the value I require to be appropriately compensated for the risk inherent in a turnaround. Kraft has the potential to be an attractive buy idea.

Contact Stuart J. Shaw, creator of the Company Stock Risk Profile™, at sjshaw@cox.net or (520) 877-9901. Shaw, a Chartered Financial Analyst and licensed in the state of Arizona as an Investment Advisor, created the Company Stock Risk Profile™ to simplify the process of analyzing securities for individual investors. Shaw’s column appears the second week of each month in Inside Tucson Business.