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Miscellaneous Food Industry Outlook Dull, High Costs to Blame

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The Zacks Food-Miscellaneous industry is made up 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 among other things. 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.

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

•    Food industry players are grappling with rising input costs. Inflationary trends are being witnessed for supplies like grains, edible oils, vegetables, dairy items, eggs, as well as animal feed, to name a few. Moreover, increased logistics, warehouse and packaging expenses have raised the cost burden. Companies such as Lamb Weston (LW - Free Report) , Conagra Brands (CAG - Free Report) , Kraft Heinz (KHC - Free Report) and Kellogg (K - Free Report) are under pressure as a result of the higher costs.

•    With the view to enhance margins and earnings, quite a few food companies are adhering to savings programs. Savings are being achieved through efforts such as streamlining of operational structures, optimizing manufacturing capacity and supply networks. Markedly, food companies like Campbell Soup (CPB - Free Report) , Smucker (SJM - Free Report) and Mondelez (MDLZ - Free Report) have implemented prudent savings plans for boosting efficiency across their respective businesses. The firms in this space are also indulging in efficient pricing to strike a balance between volumes and profits.

•    Players in the food industry frequently upgrade or widen their offerings 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 brands to meet consumers’ growing inclination for healthy offerings.

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 #163, which places it in the bottom 36% 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 13%.

Despite the dull scenario, we will present a few stocks that one can buy or retain, given their solid growth endeavors that helped them 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 gained 3.4% over this period compared with the S&P 500’s rise of 9.6% and the broader sector’s increase of 11.9%.

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 17.82X compared with the S&P 500’s 16.96X and the sector’s 19.27X.

Over the past five years, the industry has traded as high as 22.9X, at the median of 19.19X, and at a low of 14.82X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

 

Bottom Line

Rising input costs are clearly a roadblock for the Food-Miscellaneous industry players. Nevertheless, efforts to enhance savings and strengthen portfolio are helping some of them to remain afloat.

That said, we are presenting a few stocks, one with a Zacks Rank #2 (Buy) and others carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TreeHouse Foods, Inc. (THS - Free Report) with a Zacks Rank #2, has an estimated long-term earnings growth rate of 13.8%. It has outperformed the Zacks Consensus Estimate by an average of 15.6% in the trailing four quarters. Its consensus EPS estimate for the current year has improved by 2 cents the past 30 days.

Price and Consensus: THS


General Mills Inc. (GIS - Free Report) , a renowned name in snacks and ready-to-eat food items, has rallied as much as 29.8% in a year. The company has an estimated long-term earnings growth rate of 7%. It has outperformed the Zacks Consensus Estimate by an average of 9.3% in the trailing four quarters. General Mills’ consensus EPS estimate for the current fiscal year has been stable over the past 30 days.

Price and Consensus: GIS



Sysco Corporation (SYY - Free Report) has gained nearly 17% in a year. It has an estimated long-term earnings growth rate of 9.5% and delivered average positive earnings surprise of 4.7% 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: SYY
 

Investors can also count on McCormick & Company, Incorporated (MKC - Free Report) which has gained 24.5% in a year. The company carries a long-term EPS growth rate of 8%. The company delivered average positive earnings surprise of 5.8% in the last four quarters. Moreover, its consensus EPS estimate for the current fiscal year has improved 10 cents over the past 30 days.

Price and Consensus: MKC
 

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