Weighed down by weak units and high expenses, Kellogg Company (K - Free Report) was quite the dampener for investors this year. This renowned food company, specializing in cereals and snacks, tumbled 12.4% on a year to date basis, while the industry declined nearly 19.2%. Further, management trimmed earnings view for 2018. Let’s take a look at what’s ailing this Zacks Rank 4 (Sell). On the flip side, let’s also watch some companies that appear promising despite the headwinds in the Food – Miscellaneous industry that is currently ranked among the bottom 26% out of more than 250 Zacks industries.
What Made Matters Sour For Kellogg?
Kellogg’s mainstay U.S. cereal business, which accounts for a major portion of the company’s sales, has been performing poorly for a while. This can be attributed to sluggish category growth. Notably, this unit has been impacted by lower demand for cereals owing to competitive pressures from other breakfast alternatives, and changing consumer preferences. In fact, such deterrents along with Honey Smacks’ recall, hurt the company’s U.S. Morning Foods segment performance during the third quarter of 2018.
In addition to a weak cereals business, Kellogg’s snacks business has been crumbling due to weak volumes. The unit has been bearing the brunt of weakness in wholesome snacks, owing to lost distribution, and dismal performance of weight management brands.
While the aforementioned factors have been a drag on revenues, rising expenses has been marring the company’s profitability. Stiff competition in the food space has been compelling companies, including Kellogg, to engage in greater promotional and marketing spend. In fact, planned increases in advertising and promotion investments along with elevated distribution expenses impaired the company’s adjusted operating profit during the third quarter. Moreover, management expects higher investments, mix shifts and costs related to expansion of co-packed pack formats to weigh on profits in the fourth quarter.
Further we note that most players in the food space have been grappling with increased logistics spending, owing to lack of truck supplies and drivers and higher input costs. This further raises concerns for players like Kellogg, which have widespread supply chain network.
Are There Any Bright Spots in the Food Space?
While the aforementioned factors have made Kellogg an unappetizing pick in the food space, not all industry players have been losing ground. Few have managed to keep a firm footing on the back of effective strategies such as well-chalked innovations to suit consumers interests, and efforts to expand in the organic food products space. Additionally, we note that companies have been diverting their attention to cost optimization to enhance savings and boost profitability. This has been aiding them to counter rising freight and other expenses. That said, let’s take a look at some of the bright spots in the industry, for investors to park their funds.
3 Food Stocks to Vouch for in 2019
We have zeroed in on three stocks from the food space that that have yielded favorably on a year-to-date basis, and hold substantial growth potential. Each of these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
McCormick & Company, Incorporated (MKC - Free Report) is a solid bet. The company’s shares have gained 37.3% year-to date. Notably, this leading manufacturer and distributor of spices and seasonings delivered average positive earnings surprise of 5.2% in the trailing four quarters. Concerted focus on buyouts, product innovations, cost-containment measures and efficient marketing initiatives has been aiding the company’s performance. Moreover, it carries long-term earnings per share (EPS) growth rate of 9%.
Another stock that has crushed the industry with its marvelous bull-run is The Chefs' Warehouse, Inc. (CHEF - Free Report) , which has rallied 46.7% so far in the year. This leading specialty food products company has outperformed earnings estimates by average of 54.7% in the trailing four quarters. Additionally, the Zacks Consensus Estimate for earnings for 2019 depict growth of almost 31%.
Investors can also count on Lamb Weston Holdings, Inc. (LW - Free Report) , which boasts a stellar top and bottom-line surprise history. Encouragingly, this frozen potato products supplier has gained 31.9% year to date. The company is focused on making investments to enhance capacity and improving customer services. Moreover, it carries a long-term EPS growth rate of 11.8%.
With just a few days left before we ring in the New Year, it’s time to forget stocks like Kellogg and cash in on better opportunities.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
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