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4 Food Stocks Worth a Look Even as Input Cost Woes Persist

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Rising input costs have made matters difficult for players in the Zacks Food-Miscellaneous industry. Companies are grappling with high costs for essential commodities like dairy and cooking oil. Apart from this, expenses related to COVID-19 pandemic have elevated the cost burden. Moreover, players in the space are battling sluggishness in foodservice channels, as consumers continue avoiding outdoor dining.

Nevertheless, high demand stemming from at-home food consumption is helping food companies to stay afloat. Such upsides are benefiting companies like Lamb Weston Holdings Inc. (LW - Free Report) , Flowers Foods, Inc. (FLO - Free Report) , United Natural Foods, Inc. (UNFI - Free Report) and Blue Apron Holdings, Inc. APRN.

About the Industry

The Zacks Food-Miscellaneous industry consists of companies that manufacture and sell a wide range of food and packaged food items such as cereals, natural and organic products, bakery items, spices and condiments, and frozen items. Some of the companies also provide comfort food items such as chocolates and ready-to-serve meals, soups and snacks. The companies operating in this space sell their products mostly through wholesalers, distributors, large retail organizations and grocery chains.

Major Trends Shaping the Future of the Food Industry

High Input Costs a Hurdle: Players in the miscellaneous food space are grappling with rising input costs. Prices of commodities like cooking oil, vegetables, dairy items, eggs and animal feed have been rising. Moreover, companies are lately witnessing 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. Moreover, increased logistics, warehouse and packaging expenses have raised the cost burden of several industry players. Markedly, escalated input costs are putting pressure on margins of companies such as Conagra Brands, Inc. (CAG - Free Report) and Mondelez International, Inc. (MDLZ - Free Report) . Nevertheless, food companies have been focused on undertaking several initiatives to mitigate the cost-related challenges. These include streamlining of operational structures, optimizing manufacturing capacity and supply networks as well as adopting effective pricing policies.

Impact of COVID-19 on Demand: Pandemic-led social distancing has been weighing on companies’ foodservice businesses on account of soft demand across restaurants, hotels, distributors and various other channels. Nevertheless, heightened at-home cooking and dining practices have been benefiting the players in the miscellaneous food space. With more Americans staying at home and working remotely, the demand for food items, especially packaged foods, has risen sharply. Also, to maintain social distancing, consumers are seen to reduce the frequency of their shopping trips, and in turn loading pantries at once. Consequently, food companies are witnessing increased demand from retail, mass merchants, supermarkets and e-tail customers, helping offset the weak demand from foodservice clients. Such trends are working well for players like J.M. Smucker Company (SJM - Free Report) , Kellogg Company (K - Free Report) , General Mills Inc. (GIS - Free Report) , Campbell Soup Company (CPB - Free Report) and The Kraft Heinz Company (KHC - Free Report) . However, industry experts believe that at-home consumption rates are likely to moderate in the forthcoming periods, as outdoor dining slowly picks up pace.

Refining Portfolio to Suit Consumer Needs: Food companies resort to product upgrades and innovation on a regular basis to suit consumers changing tastes and preferences. Moreover, with health and well-being gaining importance in the current challenging times, there has been growth in the demand for organic and natural food offerings. In fact, a number of miscellaneous food companies are enriching their portfolio by adding more natural brands to meet consumers’ growing inclination toward healthy offerings. Additionally, companies often engage in portfolio refinement through strategic buyouts and divestiture of non-core elements. Sysco Corporation (SYY - Free Report) and McCormick & Company, Inc. (MKC - Free Report) are a few popular players who have bolstered their product portfolio with prudent acquisitions.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Food-Miscellaneous industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #188, which places it in the bottom 24% 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 positioning 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. Since the beginning of March 2020, the industry’s earnings estimate for 2020 has declined 9.7%.

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

Industry Vs. Broader Market

The Zacks Food-Miscellaneous industry has underperformed the S&P 500 composite, while it has outpaced the broader Zacks Consumer Staples sector over the past year.

The industry has dropped 4.3% over this period against the S&P 500’s growth of 6.5%. Meanwhile, the broader sector has declined 6.7% 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 17.55X compared with the S&P 500’s 22.04X and the sector’s 18.41X.

Over the past five years, the industry has traded as high as 22.9X and as low as 14.74X, with the median being at 18.44X as the chart below shows

Price-to-Earnings Ratio (Past 5 Years)

4 Food Stocks to Keep a Close Eye on

United Natural Foods: This Providence, RI, based company is a leading distributor of natural, organic and specialty food products in the United States and Canada. The  company has been gaining from rising demand stemming from coronavirus-induced higher at-home consumption. Management expects such trends to continue in the forthcoming periods. Additionally, integration synergies related to Supervalu has been an upside. Apart from these, the company is focused on strategic targets including plans such as enhancing customer base, expanding broad-line distribution channel and improving profitability. Importantly, the Zacks Consensus Estimate for United Natural’s fiscal 2021 earnings has improved significantly, over the past 60 days. Moreover, this Zacks Rank #1 (Strong Buy) company has a trailing four-quarter earnings surprise of 4.8%, on average. Impressively, the stock has rallied about 35% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: UNFI



Lamb Weston Holdings: The company prides on being a leading global manufacturer, marketer and distributor of value-added frozen potato products, particularly French fries. It has been gaining from favorable demand conditions in its retail business, backed by high at-home consumption. Markedly, the company is witnessing recovery in shipping trends at full-service restaurants. Moreover, Lamb Weston has been benefiting from robust price/mix across its segments. The company is also on track with initiatives to boost offerings and operating capacity. Shares of this Zacks Rank #2 (Buy) company have risen 10% in the past six months. The Zacks Consensus Estimate for earnings for fiscal 2021 has improved 12.5% over the past 60 days. Moreover, the company has a long-term earnings growth rate of 7%.

Price and Consensus: LW



Flowers Foods: The company, which specializes in packaged bakery foods, has been gaining from the pandemic-led pantry loading and increased at-home dining trends. Favorable price/mix has also been serving as an upside for the company. Flowers Foods has also been on track with its core priorities, which include developing its team, concentrating on brands, prioritizing margins and looking out for prudent buyouts. The company’s bottom line has outperformed the Zacks Consensus Estimate by 8.2%, on average, in the trailing four quarters. Markedly, the Zacks Consensus Estimate for earnings for 2020 has remained stable over the past 60 days. Further, this Zacks Rank #2 company has gained about 7.7% in the past six months.

Price and Consensus: FLO



Blue Apron Holdings: Based in New-York, Blue Apron specializes in providing recipes and fresh ingredients that cater to home cooking requirements. This Zacks Rank #2 company has been gaining from improved customer orders amid the pandemic. Additionally, the company has been on track with its growth strategy which consists of product innovations and adopting efficient marketing practices. Moreover, the company has been implementing operational improvements across its facilities including labor, packing and equipment optimizations. The Zacks Consensus Estimate for loss for 2020 has narrowed over the past 60 days. Notably, the company has a trailing four-quarter earnings surprise of 30.2%, on average. Shares of the company have declined 40.6% in the past six months.

Price and Consensus: APRN




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