Players in the Zacks Food-Miscellaneous industry have been gaining from brand strength due to a focus on innovation, product upgrades and portfolio refinement to cater to consumers’ altering tastes and preferences. Elevated at-home consumption has also been working well for food companies.
Robust pricing initiatives have been helping food companies, such as General Mills, Inc. GIS, Conagra Brands, Inc. CAG, Campbell Soup Company CPB and Lamb Weston Holdings, Inc. LW, counter cost inflation.
About the Industry
The Zacks Food-Miscellaneous industry consists of companies that manufacture and sell a wide range of food and packaged food items, such as cereals, flour, sauces, bakery items, spices and condiments, natural and organic food items as well as frozen products. Some companies also provide comfort food items, such as chocolates and ready-to-serve meals, soups and snacks. A few players are engaged in providing pet food products and supplements. Several food companies also offer organic and natural products. Companies operating in this space sell their products mostly through wholesalers, distributors, large retail organizations, grocery chains, mass merchandisers, drug stores as well as e-commerce service providers. Some also cater to foodservice channels, including restaurants, cafes and hotels. Others offer services to schools, hospitals and industry caterers.
Major Trends Shaping the Future of the Food Industry
Strong Pricing Endeavors: Food companies have been undertaking solid pricing initiatives to counter industry-wide cost inflation. To this end, these have been raising prices, which has been boosting sales and protecting the margins of many companies. On the last earnings call, several food players stated that they expect gains from pricing to aid sales and the overall performance in the current fiscal year.
Elevated At-Home Consumption Fuels Demand: Food companies have been witnessing favorable demand from retailers due to consumers’ elevated at-home consumption. The pandemic has made society even more aware of the importance of consuming healthy and nutritious food by cooking at home. At-home demand is likely to remain elevated as several Americans have cultivated cooking and baking at home as a new habit. As a result, the demand for organic and fresh food products has been high. Also, increased work-from-home and dine-at-home trends have been working well for companies offering packaged food and snacks, ready-to-cook meals, as well as confectionery and bakery items.
Refining Portfolio to Suit Consumer Needs: Food companies have been taking to product upgrades and innovations regularly to cater to consumers’ changing tastes and preferences. Companies are also focused on making capacity expansions and technology investments to enhance efficiency in their operations. Also, 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 miscellaneous food companies are enriching their portfolios by adding more plant-based and natural brands. Additionally, companies often engage in portfolio refinement through strategic buyouts and the divestiture of non-core elements.
Rising Costs: Food players have been encountering input cost inflation for a while now. In their last earnings releases, many companies stated that they expect input costs to remain high in the near term. Apart from this, supply-chain hurdles have increased warehouse, packaging and other logistics expenses. The rise in expenses, along with a tough labor market, has been plaguing margins. That said, companies have been focused on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing manufacturing capacity and supply networks and adopting effective pricing policies.
Zacks Industry Rank Indicates Robust Prospects
The Zacks Food-Miscellaneous industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #61, which places it in the top 24% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since the beginning of April 2023, the industry’s earnings estimate for 2023 has increased 1.8%.
Let’s take a look at the industry’s performance and current valuation.
Industry vs. Broader Market
The Zacks Food-Miscellaneous industry has outperformed the S&P 500 and the broader Zacks Consumer Staples sector over the past year.
The industry has grown 5.5% over this period compared with the S&P 500’s rise of 3.1%. Meanwhile, the broader sector has risen 3.2% in the said period.
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 18.23X compared with the S&P 500’s 18.36X and the sector’s 19.05X.
Over the past five years, the industry has traded as high as 20.6X and as low as 15.08X, with the median being at 18.03X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Food Stocks to Keep a Close Eye On
Lamb Weston: The company has been gaining from pricing actions, which have been helping it battle input and manufacturing cost inflation. This value-added frozen potato product company’s efforts to boost capacity enable it to meet rising demand conditions for snacks and fries. The consensus mark for the current fiscal-year sales and earnings per share (EPS) suggests growth of 29.6% and 116.8%, respectively from the year-ago period reported figure.
The Zacks Consensus Estimate for Lamb Weston’s current financial-year EPS has jumped 15.3% over the past 30 days. LW has a long-term earnings growth rate of 42.7%. Shares of this Zacks Rank #1 (Strong Buy) company have rallied a whopping 83% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: LW
General Mills: The manufacturer and marketer of branded consumer foods has seen its shares rise 24.8% in the past year. The Zacks Consensus Estimate for General Mills’ current financial-year EPS has moved up by 1.2% over the past 60 days. The consensus mark for the current fiscal-year sales and EPS suggests respective growth of 6.3% and 7.4% from the year-ago period reported figure. GIS has a long-term earnings growth rate of 7.5%.
This Zacks Rank #2 (Buy) company has been gaining from its Accelerate strategy. General Mills is well-placed due to its focus on its key priorities — competing efficiently through brand building, investing in Holistic Margin Management and Strategic Revenue Management initiatives to counter inflation and reshaping the portfolio.
Price and Consensus: GIS
Conagra Brands: A constant focus on innovation and the ongoing execution of the Conagra Way playbook are working well for this Zacks Rank #2 company. Further, the consumer-packaged goods food company has been gaining from its robust pricing actions and strength in the Frozen business. Conagra has a long-term earnings growth rate of 6.4%. The Zacks Consensus Estimate for CAG’s current financial-year EPS has risen by 2 cents over the past 30 days.
The consensus mark for the current fiscal-year sales and EPS suggests growth of 7.1% and 16.5%, respectively, from the year-ago period reported figure. Shares of CAG have risen nearly 6% in the past year.
Price and Consensus: CAG
Campbell Soup: This well-known manufacturer and marketer of food and beverage products has been gaining from brand strength and favorable pricing actions. On its last earnings call, management increased its full-year net sales outlook, reflecting strength in brands, favorable price elasticities and continued supply-chain execution. Moreover, Campbell Soup is benefiting from strength in its Snacks business and a focus on innovation.
The Zacks Consensus Estimate for Campbell Soup’s current financial-year EPS has remained unchanged over the past 30 days. CPB has a long-term earnings growth rate of 3.9%. Shares of this Zacks Rank #2 company have risen 10.6% in the past year. The consensus mark for the current fiscal-year sales and EPS suggests growth of 9.2% and 5.6%, respectively, from the year-ago period reported figure.
Price and Consensus: CPB
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