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Natural Foods Industry Outlook: Can Strategies Pare Cost Woes?

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The Zacks Natural Foods Products industry includes 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 delectable products 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 as well as independent stores.

Let’s take a look at the three major themes in the industry.

•    Rising awareness regarding health and consumers’ willingness to spend more on healthy items are key growth drivers for the industry. Companies in the space are investing more on research and development to introduce product formulations that are healthy and low on preservatives, without compromising on flavors. Moreover, favorable government regulations in terms of manufacturing and increasing support for organic farming are other advantages for natural food companies.

•    Companies in this space are expanding market presence and revenues through strategic partnerships, acquisitions and store expansions. Moreover, companies are investing toward digital transformations in terms of marketing and boosting sales through e-commerce channels.

•    Players in the natural foods industry are struggling against persistent rise in commodity costs. Inflationary trends in dairy items, animal feed and edible oils are adding to the cost burden. Additionally, high freight costs stemming from tight trucking capacity is a major concern. Not to forget, cut-throat competition in the natural food space is a drag on margins.

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 #174 which places it at the bottom 33% 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 7.3%.

Despite the dull scenario, we will present a few stocks that can be 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 inched down 0.2%, against the S&P 500’s rise of 3.4%. Meanwhile, the broader sector moved up 0.6%.

One-Year Price Performance
 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing stocks related to food, the industry is currently trading at 17.23X compared with the S&P 500’s 16.61X and the sector’s 22.7X.

In the past five years, the industry has traded as high as 36.29X, at the median of 21.94X and at a low of 18.54X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)
 

Bottom Line

Endeavors to enhance revenues through product launches and strategic tie-ups are helping companies in the natural food products space to stay afloat. Moreover, as food science continues to advance and consumers become increasingly health conscious, we expect the footfall in the natural food products alley to rise. Such upsides should cushion hurdles related to costs in the near term.

While none of the stocks in the Zacks universe currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy), here we present three stocks with a Zacks Rank #3 (Hold) that are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Performance Food Group Company’s (PFGC - Free Report) shares have gained 13.7% in a year. 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 17.5%. Its earnings beat the Zacks Consensus Estimate by an average of 2.9% in the trailing four quarters. Markedly, Performance Food’s consensus EPS estimate for the current fiscal year has been stable in the past 30 days.

Price and Consensus: PFGC
 

Investors can also count on Vitamin Shoppe, Inc. (VSI - Free Report) that gained as much as 41.1% in a year. Its earnings have significantly outperformed the Zacks Consensus Estimate in the trailing four quarters. This renowned nutritional retailer is benefiting from growth in the digital arena as well as product launches.

Price and Consensus: VSI
 

Sprouts Farmers Market, Inc. (SFM - Free Report) has an estimated long-term earnings growth rate of 12.2% and has an average positive earnings surprise of 3.1% in the trailing four quarters. This well-known everyday healthy grocery store gains from constant store openings and product innovations.

Price and Consensus: SFM


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