Private-Label Profits

The message for Friday’s Mad Money was to sell stocks into this strength. As good as the news was that Washington was finally taking the steps necessary to avoid another Great Depression, there are still parts of the economy worth worrying about, jobs and wages just to name a couple. Of course, the mantra of this show is that there’s always a bull market somewhere, so Cramer couldn’t let a show pass without offering up a stock worth buying.

He likes Ralcorp Holdings as a play on this struggling economy. The company makes private-label food, which comprises a lot of the generic brands you see when you go to the grocery store. The box may say Safeway , but Ralcorp makes the product.

Ralcorp sells its cereals at about a 20% discount to Kellogg and a 36% discount to General Mills . As much as Cramer likes GIS, the bottom line is that the tougher these economic times get, the more likely consumers are to reach for Ralcorp’s cheaper cereals – and salad dressing, snacks or frozen waffles.

Forty-nine percent of sales come from private-label food, and lately outlets like Safeway and Supervalu have been trying to increase their generics sales. That means these supermarkets are spending money to advertising and boost Ralcorp’s products.

Ralcorp’s also made a move in branded foods. The company bought Post cereals – Honey Bunches of Oats, Grapenuts and Raisin Bran – from Kraft. Now branded products are about 32% of Ralcorp’s sales and the Post buyout took margins to 16% from 11%. Cramer said he liked the mix in this economy, adding that no matter how bad things get there will always be people who won’t buy private label.

Overall, though, Cramer likes Ralcorp for the same reasons he likes General Mills: declining raw costs. Companies throughout the industry have been implementing price increases to accommodate their rising costs – Ralcorp included. But just because commodity inflation has subsided doesn’t mean these companies will be reducing their prices to follow suit. So the margins will expand, boosting earnings. Plus, these food and beverage names are just the type of defensive stocks traders look for in a tough economy. So a move into this sector should benefit Ralcorp.

There was some insider buying at the company, too. A couple of directors bought a combined 3,600 shares in August for between $59.48 and $61.54. They would only do that if they thought they could make money.

Ralcorp dropped about $1, or 1.4%, Friday on a valuation downgrade, but Cramer disagreed with the call. If anything, he saw the dip as a chance to buy.

Jim's charitable trust owns General Mills.

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