Growth of large food and beverage companies is increasingly being challenged by small companies. As more companies enter the space and expand their presence, it is becoming tough for the existing players to retain their market share. Further, there has been a shift in consumer preference as they are more inclined toward the 'free-from' segments (non-genetically modified, organic, and gluten free). The shift in consumer purchase decisions and evolving shopping behavior are compounding the challenges faced by food businesses. Also, there is an industry-wide weakness, as deflationary pressure in commodities such as dairy, beef and eggs are hurting the margins of food companies.

Though food companies are making aggressive efforts and channeling funds toward product and packaging innovation as well as reformulation of many existing products with more nutritional benefits, such as protein, gluten-free choices and simpler ingredient lists to meet the rapidly changing views of consumers regarding health and wellness, headwinds like food deflation, stiff competition, and aggressive promotional environment have led to a sharp decline in the share price of major food grocers like The Kroger Co., Whole Foods Market, Inc., and Sprouts Farmers Market and continues to challenge them.

The not-so-impressive scenario in the food/grocery industry is evident from the fact that out of the 260-plus industries, the Food-Miscellaneous industry holds a Zacks Industry Rank #174. It falls in the middle one-third of all Industry Ranks, which signals that the outlook for the industry is ‘Neutral’. We rank all the 260-plus industries in 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

Given this backdrop, let’s try to ascertain which of these two key food players – Pinnacle Foods, Inc. and Flower Foods, Inc. (FLO Quick QuoteFLO - Free Report) , presently make for a better investment option in face of the headwinds plaguing the food industry.

Pinnacle Foods’ market capitalization is $6.2 billion, while that of Flower Foods is just $4.0 billion. Going by its business size, Pinnacle is undoubtedly a winner and is better positioned over the long term owing to its massive scale of operations. However, short-term industry headwinds are likely to adversely impact both the companies.

Pinnacle Foods has been witnessing sluggish net sales for its Specialty Foods segment since the past two consecutive quarters, despite solid growth in the Snacks business. Due to a heightened competitive bidding environment for the already low-margin USDA stew business, the company continues to expect Specialty to remain challenged through year-end, primarily reflecting lower sales of private label canned meat. Further, Pinnacle Foods expects higher introductory expenses in 2016 due to innovation and costs related with product launches, which will increase margin pressure.

Turning to Flower Foods, the company has been witnessing disappointing sales in the core markets due to the competitive environment as well as higher marketing and legal costs. The overall fresh packaged breads market is also under pressure due to declining unit volumes.

Let’s delve into the details.

Zacks Rank

Our proprietary Zacks Rank, which is designed to predict price movements over the next one to three months, comes in handy in this scenario. Going by this metric, Parsippany, NJ-based Pinnacle is a better bet as it carries a Zacks Rank #2 (Buy), highlighting the fact that this branded food products manufacturer is likely to outperform the broader market over the next one to three months. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

On the other hand, Georgia-based Flower Foods produces and markets bakery products in the United States. It has a Zacks Rank #3 (Hold), highlighting the fact that it is likely to perform in-line with the broader market over the next few months.

The favorable Zacks Rank of Pinnacle is primarily attributable to its focus on the innovation program, acquisitions and productivity efficiency. We note that the company has delivered an average positive surprise of 2.09% in the four trailing quarters. Moreover, sales received a boost after its acquisition of Boulder Brands (completed in January). In fact, the Boulder Brands takeover is expected to contribute approximately 8−9 cents to adjusted earnings per share for the full year. Moreover, it is expected to contribute in a range of $460−$480 million to net sales.

On the other hand, Flower Foods’ earnings and sales have been declining since the past many quarters. In fact, the company has reported a negative earnings surprise in three out of the last four quarters, making for an average negative surprise of 8.8%.

VGM Score

Flower Foods seems to outpace Pinnacle on Style Score, as Flower Foods’ VGM score of ‘B’ is favorable than Pinnacle’s VGM score of ‘D’.

However, in order to screen out potential value stocks, we consider only those that have a Zacks Rank #1 or #2 (and a value score of ‘A’ or ‘B’. Since Flower Foods carries a Zacks Rank #3, we cannot consider it a favorable investing option.

Price Performance

The performance of the companies is well-reflected in the prices over the past one year. While shares of Flower Foods have underperformed the Zacks categorized Food-Miscellaneous/Diversified industry, those of Pinnacle have significantly outpaced the broader industry. Shares of Pinnacle improved significantly by 22.0%, while Flower Foods has slipped 14.6% since the past one year. The industry has advanced 7.4% since last year.

Estimate Revisions

Upward estimate revisions are indicative of positive investor sentiment about a stock. The Zacks Consensus Estimate for Pinnacle has remained unchanged for full year 2016 and climbed 2.9% for full year 2017 over the last 60 days. However, the same has gone down 1.1% for 2016 and 4% for 2017 over the last 60 days at Flower Foods, reflecting pessimism about the stock.

Pinnacle’s earnings in 2016 and 2017 are expected to grow in double-digits by 11.6% and 15.7%, respectively. However, the scenario is not favorable for Flower Foods due to soft sales. Earnings per share are projected to contract 1.8% in 2016 and grow 5.7% in 2017.

The above arguments clearly state that Pinnacle Foods is better placed currently and should offer great value to investors.

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