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High Costs Dim Natural Foods Industry's Near-Term Prospects
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The Zacks Natural Foods Products industry comprises companies that produce and sell a range of organic and natural vegetables, fruits, frozen items including meat, baked items, dairy products as well as ready-to-eat meals, and snacks. A few companies also offer delectable items such as ice cream. Some others offer specialized personal care products and health supplements. The firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations, grocery chains, independent stores. as well as online retailing platforms.
Let’s take a look at the three major industry themes.
• The mainstream food sector is witnessing rising demand for healthy food, courtesy of consumers’ growing willingness to stay fit. This, in turn, has been the key growth driver for the natural food products industry. Companies in this space are investing in research and development to come up with unique formulations that are healthy and low on preservatives, without compromising on flavors. Products such as plant derived protein, fermented food and natural sweeteners are becoming rapidly popular. Companies are also coming up with convenient and ready to eat natural foods to cater to fast paced lives. Moreover, increasing government support for organic farming is an added advantage.
• To boost portfolio strength and expand revenue opportunities, natural food industry players resort to strategic partnerships, acquisitions and store expansions. Companies are also rapidly expanding their presence in the digital realm through e-commerce operations.
• Industry participants are struggling against persistent rise in cost of inputs such as grains, dairy items, animal feed and edible oils to name a few. Moreover, higher cost of logistics stemming from tight trucking capacity is a concern. Additionally, companies are required to invest heavily in packaging and storage facilities as natural products perish at a faster rate due to the absence of added chemicals and preservatives. This further aggravates the cost burden.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Natural Foods Products industry is housed within the broader Zacks Retail and Wholesale sector. The industry currently carries a Zacks Industry Rank #220 which places it in the bottom 14% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for 2019 has declined nearly 11%.
Despite the dull scenario, we will present a few stocks that can be bought or retained, considering their robust growth endeavors. Prior to that, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Lags on Stock Market Performance
The Zacks Natural Foods Products industry has lagged the Zacks S&P 500 composite and the broader Zacks Retail and Wholesale sector in the past year. The industry declined 7.9% against the S&P 500’s rise of 4.7%. Meanwhile, the broader sector inched down 0.1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing stocks related to food, the industry is currently trading at 16.95X compared with the S&P 500’s 16.86X and the sector’s 23.85X.
In the past five years, the industry has traded as high as 26.53X, at the median of 18.44X and at a low of 15.62X as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
Bottom Line
As food science continues to advance and consumers become increasingly health conscious, we expect the footfall in the natural food products aisle to rise. Moreover, companies are trying to enhance capabilities through product launches and strategic tie-ups. A few of them are also looking to optimize operations and minimize spending. Such measures should help cushion the hurdles related to rising input costs in the near term.
While none of the stocks in the Zacks universe currently sport a Zacks Rank #1 (Strong Buy), here we present three stocks that are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Vitamin Shoppe, Inc. , a renowned nutritional retailer, carries a Zacks Rank #2 (Buy). Its earnings beat the Zacks Consensus Estimate in three out of the trailing four quarters. The company is benefitting from product launches as well as initiatives to drive efficiencies. It also strives to reduce cost of operations.
Price and Consensus: VSI
Investors can also count on Performance Food Group Company (PFGC - Free Report) that gained 8.3% in a year and carries a Zacks Rank #3 (Hold). This renowned natural food player, specializing in frozen items, is gaining from growth in case volumes, strong brand position as well as segmental advancements. The company has an estimated long-term earnings growth rate of 11.6%. Its earnings beat the Zacks Consensus Estimate by average of 3.8% in the trailing four quarters. Markedly, Performance Food’s consensus EPS estimate for the current fiscal year has improved by a penny in the past 30 days.
Price and Consensus: PFGC
Sprouts Farmers Market, Inc. (SFM - Free Report) has an estimated long-term earnings growth rate of 9.8% and delivered average positive earnings surprise of 6.1% in the trailing four quarters. This well-known everyday healthy grocery store gains from constant store openings and product innovations. The company, which carries a Zacks Rank #3, is also progressing well with investments in technology to boost efficiency.
Price and Consensus: SFM
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High Costs Dim Natural Foods Industry's Near-Term Prospects
The Zacks Natural Foods Products industry comprises companies that produce and sell a range of organic and natural vegetables, fruits, frozen items including meat, baked items, dairy products as well as ready-to-eat meals, and snacks. A few companies also offer delectable items such as ice cream. Some others offer specialized personal care products and health supplements. The firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations, grocery chains, independent stores. as well as online retailing platforms.
Let’s take a look at the three major industry themes.
• The mainstream food sector is witnessing rising demand for healthy food, courtesy of consumers’ growing willingness to stay fit. This, in turn, has been the key growth driver for the natural food products industry. Companies in this space are investing in research and development to come up with unique formulations that are healthy and low on preservatives, without compromising on flavors. Products such as plant derived protein, fermented food and natural sweeteners are becoming rapidly popular. Companies are also coming up with convenient and ready to eat natural foods to cater to fast paced lives. Moreover, increasing government support for organic farming is an added advantage.
• To boost portfolio strength and expand revenue opportunities, natural food industry players resort to strategic partnerships, acquisitions and store expansions. Companies are also rapidly expanding their presence in the digital realm through e-commerce operations.
• Industry participants are struggling against persistent rise in cost of inputs such as grains, dairy items, animal feed and edible oils to name a few. Moreover, higher cost of logistics stemming from tight trucking capacity is a concern. Additionally, companies are required to invest heavily in packaging and storage facilities as natural products perish at a faster rate due to the absence of added chemicals and preservatives. This further aggravates the cost burden.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Natural Foods Products industry is housed within the broader Zacks Retail and Wholesale sector. The industry currently carries a Zacks Industry Rank #220 which places it in the bottom 14% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for 2019 has declined nearly 11%.
Despite the dull scenario, we will present a few stocks that can be bought or retained, considering their robust growth endeavors. Prior to that, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Lags on Stock Market Performance
The Zacks Natural Foods Products industry has lagged the Zacks S&P 500 composite and the broader Zacks Retail and Wholesale sector in the past year. The industry declined 7.9% against the S&P 500’s rise of 4.7%. Meanwhile, the broader sector inched down 0.1%.
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One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing stocks related to food, the industry is currently trading at 16.95X compared with the S&P 500’s 16.86X and the sector’s 23.85X.
In the past five years, the industry has traded as high as 26.53X, at the median of 18.44X and at a low of 15.62X as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
Bottom Line
As food science continues to advance and consumers become increasingly health conscious, we expect the footfall in the natural food products aisle to rise. Moreover, companies are trying to enhance capabilities through product launches and strategic tie-ups. A few of them are also looking to optimize operations and minimize spending. Such measures should help cushion the hurdles related to rising input costs in the near term.
While none of the stocks in the Zacks universe currently sport a Zacks Rank #1 (Strong Buy), here we present three stocks that are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Vitamin Shoppe, Inc. , a renowned nutritional retailer, carries a Zacks Rank #2 (Buy). Its earnings beat the Zacks Consensus Estimate in three out of the trailing four quarters. The company is benefitting from product launches as well as initiatives to drive efficiencies. It also strives to reduce cost of operations.
Price and Consensus: VSI
Investors can also count on Performance Food Group Company (PFGC - Free Report) that gained 8.3% in a year and carries a Zacks Rank #3 (Hold). This renowned natural food player, specializing in frozen items, is gaining from growth in case volumes, strong brand position as well as segmental advancements. The company has an estimated long-term earnings growth rate of 11.6%. Its earnings beat the Zacks Consensus Estimate by average of 3.8% in the trailing four quarters. Markedly, Performance Food’s consensus EPS estimate for the current fiscal year has improved by a penny in the past 30 days.
Price and Consensus: PFGC
Sprouts Farmers Market, Inc. (SFM - Free Report) has an estimated long-term earnings growth rate of 9.8% and delivered average positive earnings surprise of 6.1% in the trailing four quarters. This well-known everyday healthy grocery store gains from constant store openings and product innovations. The company, which carries a Zacks Rank #3, is also progressing well with investments in technology to boost efficiency.
Price and Consensus: SFM
Will you retire a millionaire?
One out of every six people retires a multimillionaire. Get smart tips you can do today to become one of them in a new Special Report, “7 Things You Can Do Now to Retire a Multimillionaire.”
Click to get it free >>