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Miscellaneous Food Industry Outlook Eclipsed by Rising Costs

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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. 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:

  • Input cost inflation has been a hurdle for many food industry players. Companies have been reeling under rising costs for commodities like grains, vegetables, dairy items, eggs, as well as animal feed among others. Moreover, increased logistics, warehouse and packaging expenses have raised the cost burden. Companies such as Conagra Brands CAG, Sysco Corporation (SYY - Free Report) , Campbell Soup CPB, Kraft Heinz KHC and Kellogg K are under pressure as a result of the higher costs.
  • Companies in the food space have been taking to saving initiatives to tide over cost-related challenges and enhance margins. Savings are being achieved through efforts such as streamlining of operational structures, optimizing manufacturing capacity and supply networks. Markedly, food companies like McCormick MKC, Smucker SJM, General Mills GIS and Mondelez MDLZ have implemented prudent savings plans to improve efficiency. Apart from this, efficient pricing to strike a balance between volumes and profits is likely to keep aiding.
  • 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 divestiture 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 toward 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 #164, 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. Since the end of July 2019, the industry’s earnings estimate for 2020 has declined 2.3%.

Despite the murky scenario, we will present a few stocks that one can buy or retain, given their solid growth endeavors. 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 7.7% over this period compared with the S&P 500’s rise of 20.7% and the broader sector’s increase of 11.1%.

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 18.38X compared with the S&P 500’s 19.3X and the sector’s 19.7X.

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

Elevated input costs are clearly a barrier for the Food-Miscellaneous industry players. Nonetheless, saving efforts and focus on portfolio refinement are helping some of them to remain afloat.

All said, we are presenting a few stocks from the Zacks Food- Miscellaneous industry, which are well positioned to capitalize on the opportunities.

Darling Ingredients Inc. DAR with a Zacks Rank #1 (Strong Buy), has seen its shares increase 31% in the past year. The current-year consensus EPS estimate for this provider of cooking oil and bakery waste recycling and recovery solutions has improved by 14.2% the past seven days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: DAR

Lamb Weston Holdings Inc. LW, a renowned potato products provider, has rallied as much as 36.4% in a year. The Zacks Rank #2 (Buy) company has an estimated long-term earnings growth rate of 8.8%. It has outperformed the Zacks Consensus Estimate in the trailing four quarters by 7.3%, on average. Lamb Weston’s consensus EPS estimate for the current fiscal year has increased by 2 cents over the past 30 days.

Price and Consensus: LW

The Hain Celestial Group, Inc. HAIN has gained 47% in a year. The natural and organic foods provider delivered average positive earnings surprise of 7% in the last four quarters. The Zacks Rank #2 company’s consensus EPS estimate for the current fiscal year has increased 4.5% over the past 30 days.

Price and Consensus: HAIN

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