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High Costs Weigh on Miscellaneous Food Industry Prospects

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The Zacks Food-Miscellaneous industry comprises 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 among other things. A few 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.

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

•    Rising input costs is a concern for a number of players in the food industry. The companies in the space have been challenged by steep pricing for supplies like grains, edible oils, vegetables, dairy items as well as animal feed, to name a few. Moreover, higher costs of logistics, stemming from tight trucking capacity along with increased warehouse and packaging expenses increase the cost burden.

•    Food companies are increasingly relying on savings programs to broaden profitability. Savings are being achieved through efforts such as streamlining of operational structures, optimizing manufacturing capacity and supply networks. Moreover, companies are indulging in efficient pricing to a strike balance between volumes and profits.

•    Players in the food space are required to frequently upgrade or widen their offerings so as to keep pace with consumers’ changing tastes and preferences. Companies often engage in portfolio refinement through strategic buyouts and divestitures of non-core elements. In fact, a number of miscellaneous food companies are enriching their portfolio by adding more natural and organic foods to meet consumers’ growing inclination for healthy offerings. In order to promote newly added products, companies are adopting efficient promotional practices. Moreover, companies are widening market reach through e-commerce channels.

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 #151, which places it in the bottom 41% 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. Over the past year, the industry’s earnings estimate for 2019 has declined nearly 10.6%.

Despite the dull scenario of the industry, we will present a few stocks that one can buy. Their solid growth endeavors have helped them to tide over the blues. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry Lags S&P 500 and Sector

The Zacks Food-Miscellaneous industry has lagged the Zacks S&P 500 composite and the broader Zacks Consumer Staples sector in the past year.

The industry has declined 4.7% over this period against the S&P 500’s rise of 1.4% and the broader sector’s increase of 4.7%.

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 16.88X compared with the S&P 500’s 16.79X and the sector’s 18.78X.

Over the past five years, the industry has traded as high as 24.57X, at the median of 20.45X, and at a low of 16.16X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Although rising costs are a roadblock, efforts by Food-Miscellaneous industry players to enhance savings and to strengthen portfolio are helping them to remain afloat.

That said, we are presenting three stocks, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

General Mills Inc. (GIS - Free Report) , a renowned name in snacks and ready-to-eat food items, has gained as much as 27.5% in a year. The company has an estimated long-term earnings growth rate of 7%. It has outperformed the Zacks Consensus Estimate by average of 11.1% in the trailing four quarters. Markedly, General Mills’ consensus EPS estimate for the current fiscal year has improved by a penny over the past seven days.

Price and Consensus: GIS

The Chefs' Warehouse, Inc. (CHEF - Free Report) has rallied nearly 22.7% in a year. It has an estimated long-term earnings growth rate of 15% and delivered average positive earnings surprise of 3.6% in the last four quarters. The company’s consensus EPS estimate for the current fiscal year has been stable over the past 30 days.

Price and Consensus: CHEF

Investors can also count on Lamb Weston Holdings, Inc. (LW - Free Report) , which boasts stellar bottom-line surprise history. The company carries a long-term EPS growth rate of 11.8%. Moreover, its consensus EPS estimate for the current fiscal year has improved by a penny over the past 30 days.

Price and Consensus: LW

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General Mills, Inc. (GIS) - free report >>

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