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Natural Foods Industry Outlook Bright on Burgeoning Demand

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The Zacks Natural Foods Products industry comprises companies that manufacture and sell organic and natural fruits, vegetables, dairy products as well as packaged ready-to-eat meals, snacks and frozen food. Some of these companies also offer items like ice cream, personal care products and health supplements. Firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations, grocery chains and restaurants. Some of the players also operate through independent stores.

Let’s take a look at the major industry themes:

  • Companies in the natural food products space are benefitting from burgeoning demand from the coronavirus-led stock hoarding as well as increased at-home consumption. Incidentally, with more Americans sheltering at home and working remotely, the demand for food-related items has risen sharply. Also, to maintain social distancing, consumers are largely reducing the frequency of their shopping trips, and in turn loading pantries at once. Consequently, natural food product players are gaining from increased demand at retailers, grocery chains as well as independent stores. However, some companies are facing challenges associated with weak demand from foodservice clients like restaurants, coffee shops and hotels.
  • Increasing health awareness together with consumers’ willingness to spend more on healthy items is a key growth driver. Companies in the space have been focused on research and development to introduce product formulations that are healthy and low on preservatives, without compromising on flavors.
  • Companies are expanding market presence and revenues through strategic partnerships, acquisitions and store expansions. Moreover, companies are investing toward digital transformation, in terms of marketing and boosting sales through e-commerce channels. To enrich customers’ experience and drive sales, some firms are undertaking efforts to enhance delivery services.
  • Commodity cost inflation is a concern for industry players. Inflationary trends in dairy items, animal feed and edible oils add to the cost burden. Additionally, some players are lately seeing high costs associated with operating amid the pandemic – like increased pay to frontline workers, incentives and bonuses, and costs related to sanitization and safety measures. Apart from this, cut-throat competition in the natural food space is a threat to margins.

Zacks Industry Rank Indicates Robust Prospects

The Zacks Natural Foods Products industry is housed within the broader Zacks Retail - Wholesale sector. The industry currently carries a Zacks Industry Rank #14, which places it at the top 6% 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 solid 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 top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident about this group’s earnings growth potential. Since the end of April 2020, the industry’s consensus earnings estimate for the current year has increased 34.9%.

Given the encouraging scenario, we will present a few stocks that one can buy or retain, given their solid growth endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry Underperforms the S&P 500

The Zacks Natural Foods Products industry has underperformed the S&P 500 composite as well as the broader Zacks Retail – Wholesale sector over the past year.

The industry has dropped 3.1% over this period against the S&P 500’s growth of 6.1%. Meanwhile, the broader sector has rallied 24.4% in the said time frame.

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 consumer staples stocks, the industry is currently trading at 15.76X compared with the S&P 500’s 22.46X and the sector’s 34.29X.

Over the past five years, the industry has traded as high as 21.74X and at the median of 18.38X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

The natural food products space appears to be in a good position, given the increased demand and pantry loading of essential items amid the pandemic – though some companies are troubled by weak demand from foodservice customers. Apart from this, companies in the space are well-placed on the back of their revenue-boosting initiatives like product launches and prudent alliances. These upsides should help the companies tackle input cost inflation as well as high costs associated with COVID-19.

All said, we are presenting stocks from the Natural Foods Products universe that are well-positioned to capitalize on the opportunities.

Sprouts Farmers Market, Inc. (SFM - Free Report) , which has gained 28.6% year to date, currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-fiscal earnings per share has moved north by a couple of cents in the last 30 days. Notably, Sprouts Farmers Market surpassed earnings estimates by an average of 37.2% in the trailing four quarters. Additionally, the company has long-term EPS growth rate of 9.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: SFM

SpartanNash Company (SPTN - Free Report) : The Zacks Rank #1 stock has surged 45.1% in the year so far. The Zacks Consensus Estimate for its current-fiscal earnings has climbed 16.9% in the last 30 days. The company has surpassed earnings estimates by an average of 17.1% in the trailing four quarters.

Price and Consensus: SPTN

Performance Food Group Company (PFGC - Free Report) : The provider of food and related products has, on average, positive earnings surprise of 47.5% in the last four quarters. The Zacks Rank #3 company’s consensus estimate for the current fiscal-year earnings has remained stable in the past 30 days.

Price and Consensus: PFGC

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