Despite the fact that input costs are on the rise across the industry with additional capacity only likely to increase these costs further, there are some food stocks with something unique to offer that make them Strong Buys (Zacks Rank #1). (You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here).

Since I’ve chosen a motley crowd, including a specialty foods supplier, a frozen foods supplier and a couple of meat producers, it’s hard to get into industry specifics. Suffice it to say that not all food companies are created equal. So there are opportunities in the space that we can tap into.  

McCormick & Company, Inc. (MKC Quick QuoteMKC - Free Report)

McCormick & Co is a global leader in the manufacture, marketing and distribution of spices, herbs, seasonings, flavorings and other specialty food products. The company also, through subsidiary corporations, manufactures and markets specialty plastic bottles and tubes for food, personal care and other industries.

The factors pressuring the market include rising input costs, increasing private label competition particularly given Amazon’s Whole Foods acquisition and, in McCormick’s case, also high (although manageable) financial leverage. Finally, there was the acquisition of Reckitt Benckiser’s food division, including Frank's Red Hot and French's mustard that required it to both issue fresh shares (so dilution) and additional debt (so increased leverage).

But there are also factors working in its favor, including the benefits from the acquisition such as market consolidation and therefore increased negotiating power with retailers, scope for international expansion and management’s stated goal of bringing down the leverage over the next three years with the resultant positive impact on earnings. The acquisition aside, McCormick enjoys a coveted position in the specialty foods space because it sells spices, use of which is likely to increase as against sugary or salty foods sold by others, usage of which is coming down. It therefore enjoys some pricing power.

The industrial business is a nice complement to the consumer business and provides a hedge because it generates stronger growth off a smaller base of more diverse customers. The company also shows a slow and steady earnings growth rate, which helps it pay a nice dividend year upon year. 

The company is expected to grow revenue 9.3% in 2017 and less than 11.5% in 2018. It is expected to grow earnings 10.9% and 10.8%, respectively, this year and next. The current quarter earnings estimate is up 4.2%. The 2017 estimate is up 2.7% and 2018 estimate is up 4.3% in the last 60 days. The company topped estimates in each of the last four quarters at an average rate of 4.0%.

Nomad Foods (NOMD Quick QuoteNOMD - Free Report)

Feltham, UK-based Nomad Foods Ltd. manufactures and distributes frozen foods primarily in the United Kingdom, Italy, Germany, Sweden, France and Norway. The company's portfolio of frozen food brands includes Birds Eye, Iglo and Findus, which it acquired over the last few years.

Nomad’s strategy is to grow through acquisitions. It typically focuses resources on 4-5 categories in each country, in which it seeks to command significant market share and generate strong gross margins. These categories are, by definition, its “must-win battles,” attracting the bulk of R&D, advertising and promotion money. Another group comprising 10-20% of revenue gets some R&D but no advertising money. The rest of the business is managed for cost and allowed to die a natural death where necessary. 

The company is expected to grow revenue 6.7% in 2017 and less than 1% in 2018. It is expected to grow earnings 19.6% and 17.7%, respectively, this year and next. The earnings estimate for the December quarter is up 33.3%. The 2017 estimate is up 11.1% and 2018 estimate is up 18.2% in the last 60 days.

Tyson Foods (TSN Quick QuoteTSN - Free Report)

Tyson Foods is the world's largest fully-integrated producer, processor and marketer of chicken and poultry-based food products. Tyson is a comprehensive supplier of value-added chicken products through food service, retail grocery stores, club stores and international distribution channels. Although its core business is chicken, in the U.S., Tyson is also the second largest maker of corn and flour tortillas under the Mexican Original brand and through its subsidiary Cobb Vantress, the top chicken breeding stock supplier.

The meat production industry is highly competitive although Tyson, along with a few others command leading market share. All the top meat producers have extensive chicken processing operations, so they have been impacted by regulatory scrutiny on price fixing charges. It’s also true that for whatever reason, chicken prices have been robust, helping these companies.

The other factor is demand, which is based on increased consumption across the world, especially by the growing middle class in developing countries that will account for most of the growth. The USDA estimates that broiler meat production will grow 1% this year partly because of numerous outbreaks of highly pathogenic avian influenza (HPAI) across Asia, Africa, Europe, Russia and the U.S. as offset by the growing demand for low-cost animal protein. Given the low production growth rate, companies with a broad product range, distribution capacity/relationships are likely to be more successful (provided they can also find a way to keep costs down).

It’s also been reported that major distributors/grocers like Costco are starting their own poultry operations, which may have an impact on the big meat producers and can also hurt their margins.

Tyson also generates some revenue from other meats like beef that while generating lower margins, result in steadier volumes. China lifting the beef ban is a positive in this respect, which along with continued strength in domestic demand are good for its results.

Tyson has consistently grown revenues in each of the last 10 years barring 2016. That trend is already reversing this year. Gross profits, EBIT, EBITDA and net income have also moved up steadily, particularly after 2014. With cost savings from the AdvancePierre integration, supply chain improvements and elimination of 450 management positions across three locations yet to kick in, the company is likely to see margin expansion. The recent spike in the debt level may help finance the Kansas chicken processing plant it’s planning to build.

Tyson’s surprise history hasn’t been anything to write home about, with the company missing estimates almost as frequently as it beat. But it’s encouraging that its earnings estimates are showing an upward trend. Accordingly, estimates for 2017 and 2018 are up 1% and 6.8%, respectively. Overall earnings are expected to be up 17.0% this year and 7.3% in 2018 despite much slower revenue growth expectations.

Pilgrim's Pride Corp. (PPC Quick QuotePPC - Free Report)

Pilgrim's Pride is one of the largest chicken companies in the U.S., Mexico and Puerto Rico. The company's fresh chicken retail line is sold throughout the U.S., throughout Puerto Rico, and in the northern and central regions of Mexico. Its prepared chicken products are sold to some of the largest customers in the food service industry across the US. Additionally, commodity chicken products are exported to over 90 countries.

Being a vertically integrated company, it controls every phase of the production including feed mills, hatcheries, processing plants and distribution centers across the U.S., Puerto Rico and Mexico. This helps it to keep costs down.

The company recently acquired JBS-owned Moy Park, which has extensive operations in the UK from where it sources its chickens. These are mostly sold to supermarkets and quick service restaurants in the UK and Ireland itself although some of the production is also sold to European countries. So the acquisition enables expansion into the European market through a local player. This is perfect in terms of acceptance (local brand), geographical diversification (an important market in Europe) and cost savings (costs to be eliminated on integration of Moy Park will be around $50 million).

People’s Pride’s revenue shows an upward trend over the last ten years. While 2015 and 2016 could have been better, 2017 is shaping up to be a good year with the revenue growth returning. The profitability ratios tell the same story. Moreover, 2017 estimates have jumped 98% and 2018 estimated have jumped over 10% in the last 60 days. The surprise ratio has been generally disappointing, but there was a positive (turning point?) in the last quarter.   

Wrapping Up

While each of these companies have a strong market position and factors supporting steady growth over the long term, it’s worth noting that they are all trading at a premium to the industry. So while some may fear downside risk, the fact remains that these are stocks that we may want to accumulate.

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