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Rising Costs Weigh on Natural Foods Industry's Prospects

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The Zacks Natural Foods Products industry consists of companies that produce and sell a range of organic and natural vegetables, fruits, frozen items including meat, baked items, dairy products as well as ready-to-eat meals, and snacks. Some of the companies also offer specialized personal care products and health supplements. The firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations, grocery chains, independent stores as well as online retailing platforms.

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

•    Consumers’ growing willingness to stay fit has been the key growth driver for the natural food products industry, especially for organic items such as fruits and vegetables. Companies in this space are investing extensively in research and development to come up with products that are healthy and low on preservatives, without compromising on flavors. Products such as plant derived protein, fermented food and natural sweeteners are becoming rapidly popular. Companies are also coming up with ready-to-eat natural food options to cater to consumers’ fast-paced lives. Moreover, rising government support for organic farming is an advantage.

•    Natural food industry players are undertaking strategic partnerships, acquisitions and store expansions in order to boost portfolio strength and augment revenue opportunities. Companies are also rapidly expanding their presence in the digital realm through e-commerce operations.  

•    Industry participants are struggling against persistent rise in cost of inputs such as grains, dairy items, animal feed and edible oils to name a few. Moreover, higher cost of logistics is a concern. Additionally, companies are required to invest heavily in packaging and storage facilities as natural products perish at a faster rate due to the absence of added chemicals and preservatives. This further aggravates the cost burden. Such rising costs have been a hurdle for companies like Sprouts Farmers Market, Inc. (SFM - Free Report) and Farmer Bros. Co. (FARM - Free Report) .

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 #220, which places it in the bottom 13% of more than the 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 9.6%.

Despite the dull scenario, we will present a few stocks that can be bought or 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 S&P 500 & Sector

The Zacks Natural Foods Products industry has lagged the Zacks S&P 500 composite and the broader Zacks Retail and Wholesale sector year to date. The industry has gained 3.6%, compared with the S&P 500’s rise of 22.3% and the broader sector’s increase of 21.4%.

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 stocks related to food, the industry is currently trading at 17.58X compared with the S&P 500’s 17.46X and the sector’s 24.14X.

In the past five years, the industry has traded as high as 26.53X, at the median of 18.25X and at a low of 15.62X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)
 
Bottom Line

Continued innovation and rising health consciousness are likely to keep aiding growth in the natural food products space. Moreover, companies are undertaking measures to enhance supply chain efficiencies and optimize operations, which are likely to help them overcome hurdles related to rising input costs in the near term.

We are presenting a Zacks Rank #2 (Buy) and a Zacks Rank #3 (Hold) stock from the Zacks Natural Foods Products industry, which are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Vitamin Shoppe, Inc. (VSI - Free Report) , a renowned nutritional products retailer, carries a Zacks Rank #2. Shares of the company have rallied 36.4% in the year-to-date period. Its earnings beat the Zacks Consensus Estimate in three out of the trailing four quarters. The company is benefiting from product launches as well as initiatives to drive efficiencies. It also strives to reduce cost of operations.  

Price and Consensus: VSI
 

SpartanNash Company (SPTN - Free Report) has an estimated long-term earnings growth rate of 7%. The company currently carries a Zacks Rank #3. It has been gaining from prudent acquisitions and cost-saving measures.

Price and Consensus: SPTN



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