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Forget Conagra Brands (CAG), Focus on These 3 Food Stocks for 2022

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Matters appear to be sour for Conagra Brands, Inc. (CAG - Free Report) . The company has been grappling with escalating costs, which are likely to linger. Although this consumer packaged goods food company is focused on undertaking pricing and saving efforts to battle cost inflation, benefits from these initiatives are likely to take time to be realized.

Other than this, the company’s sales are being adversely impacted by recent divestitures as well as tough comparisons with the year-ago period’s pandemic-led demand. During the first quarter of fiscal 2022, net sales of $2,653.3 million decreased 1% year over year in the quarter. Organic net sales dropped 0.4% due to lower volumes to the tune of 2%. Volumes in most of the company’s segments were hurt by tough comparisons with the year-ago period’s initial pandemic-led demand surge. Adjusted earnings came in at 50 cents, which dropped 28.6% year over year, mainly due to lower gross profit.

Clearly, the ride appears to be currently rough for Conagra Brands. We note that this Zacks Rank #4 (Sell) stock has declined almost 5% so far this year, whereas the industry has gained 3.4% in the same time frame. Let’s take a closer look at the factors making things bland for Conagra Brands, before digging into some delicacies from the Food – Miscellaneous space.

Factors Making Things Bitter for Conagra Brands

Conagra has been lately encountering cost of goods sold inflation. In the first quarter of fiscal 2021, the company’s adjusted gross margin declined 530 bps to 25.4%. The downside was the result of a decline in net sales, cost of goods sold inflation and loss related to the divestiture of H.K. Anderson business, Peter Pan peanut butter business and Egg Beaters business. The divestitures are collectively referred to as Sold Businesses. Management expects cost inflation of nearly 11% in fiscal 2022 compared with 9% predicted earlier. Although management is focused on undertaking relevant saving and pricing efforts to combat this inflation, the timing and gains from these initiatives are likely to be more skewed toward the second half of fiscal 2022.

Apart from this, CAG’s brand-building investments might also impact the margins. During the first quarter of fiscal 2022, SG&A expenses, including advertising and promotional (A&P) costs increased 3.3% to $310 million. A&P costs increased 35.3% to $62 million due to increased e-commerce investments. Management continues to expect SG&A expenses to impact operating margins adversely.

While cost inflation is a hurdle for a number of food companies, there are stocks in the space that appear well placed for 2022, on the back of their strategic growth endeavors and foodservice business recovery.

Zacks Investment ResearchImage Source: Zacks Investment Research

Food Space Not All That Bland

A number of companies in the food space have been benefiting from the rebound in the foodservice channel, with the economy opening up and Americans stepping out. With curbs lifted, traffic has been picking up at restaurants, cafes and other foodservice joints, thus benefiting companies catering to them. While retail demand has declined from the year-ago period’s spike, it is still above the pre-pandemic levels. This can be attributable to the fact that at-home consumption remains elevated as a number of Americans have cultivated cooking and baking at home as a new habit. These upsides work well for companies offering packaged food and snacks, ready-to-cook meals, meat-based food offerings as well as bakery items.

We note that companies have been making the most of these trends through concerted efforts such as innovation, product upgrades and portfolio refinement via prudent buyouts and divestitures. Some companies have also been focused on making capacity expansions and automation technology investments to enhance efficiency in their operations. Apart from these, food companies have been undertaking efforts to resonate with consumers’ changing tastes and preferences. Speaking of which, these companies have been coming up with organic and nutrient-rich food options as health and wellness have gained further importance amid the pandemic.  A number of companies have been developing their digital capacity as well, with online shopping gaining prominence.

On that note, we have picked three stocks from the Food – Miscellaneous universe, which have been performing decently and are likely to continue on growth trajectory.

3 Food Stocks in Focus

The Hain Celestial Group (HAIN - Free Report) is worth relishing. The Hain Celestial, which provides various natural and organic foods as well as personal care products in North America and Europe, currently carries a Zacks Rank #2 (Buy) at present. It has a trailing four-quarter earnings surprise of 9.7%, on average. Shares of The Hain Celestial have moved up 3.7% in the year so far. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for HAIN’s next financial-year sales and earnings per share (EPS) suggests growth of 13.3% and 5.6%, respectively, from the year-ago period. The company has been gaining from investments in key brands. Well-chalked out innovations and acquisitions along with marketing and assortment optimization efforts bode well. Hain Celestial is also progressing well with the transformation strategy to deliver sustainable profits. The strategy is aimed at simplifying its portfolio, identifying additional areas of productivity savings and enhancing margins

United Natural Foods, Inc. (UNFI - Free Report) is also appetizing. This Zacks Rank #2 company distributes natural, organic, specialty, produce, and conventional grocery and non-food products. United Natural Foods has a trailing four-quarter earnings surprise of 35.4%, on average. The company has been focused on its three-pronged strategy based around deepening its penetration with existing customers, introducing owned brands to new customers as well as channels and undertaking customer-friendly innovations. United Natural is also benefiting from e-commerce strength, thanks to increased digital solutions offered by the company.

The Zacks Consensus Estimate for UNFI’s next financial-year sales and EPS suggests growth of 3.4% and nearly 7%, respectively, from the year-ago period’s figures. Shares of United Natural have surged a whopping 208% in the year so far.

Investors can take a look at Kellogg Company (K - Free Report) . This manufacturer and marketer of ready-to-eat cereal and convenience foods, currently carries a Zacks Rank #3 (Hold). Kellogg has gained about 5% year to date. Kellogg has been benefiting from the focus on the Deploy for Growth strategy, strength in emerging markets as well as robust brands like Pringles. Apart from this, revival in the away-from-home channel has been working well for the company.

The Zacks Consensus Estimate for Kellogg’s next financial-year sales and EPS suggests growth of 2.2% and 1.4%, respectively, from the year-ago period’s figures. K has a trailing four-quarter earnings surprise of 9.5%, on average.