Demand for nutritious and healthy offerings has been on the rise as maintaining good health is becoming a priority for consumers. Such a trend is working well for companies in the Zacks natural food products industry. Industry participants are increasing their portfolio strength through effective innovations and acquisitions. Some players are also making bigger investments to increase digital capabilities.
Natural food companies are adopting strategic pricing to counter rising cost inflation. Perks like these are likely to work well for companies like High Performance Food Group Company PFGC, Sprouts Farmers Market, Inc. OFS and SpartanNash Company SPTN.
about the industry
The Zacks Natural Foods Industry comprises companies that manufacture and sell a wide range of fruits, vegetables, dairy products, flour, bakery items, meat and seafood, as well as organic and natural spices and seasonings. They also offer ready-to-eat packaged meals, snacks, cereals, and frozen foods. Some of these companies offer comfort foods like ice cream and soups. Some players offer personal care products and health supplements. Companies operating in this space sell their products primarily through wholesalers, distributors, large retail organizations, supermarket chains, mass merchandisers, pharmacies, and e-commerce service providers. Some also cater to food service channels, including restaurants, cafes, and hotels. Others also offer services to schools, hospitals and catering companies. Some of the players operate through independent retail stores.
Major trends shaping the future of the natural foods industry
Increasing inclination towards healthy food options: The pandemic has made society aware of the importance of consuming healthy and nutritious food by cooking at home. As a result, the demand for fresh, organic food products has been high, acting as an asset to players in the natural food products industry. Although cookouts are back on the scene, many people are likely to continue the habit of consuming natural and organic foods at home to maintain good health. These trends are likely to continue to support the demand for fresh, natural and organic food products. Companies in the field of natural food products are also seeing a renaissance in their foodservice business channels as demand for restaurants and cafes increases. Industry experts believe that even when dining outdoors, consumers are likely to opt for healthier food options. This is likely to lead restaurants and cafes to add healthier, natural ingredient-based foods to their menu.
Focus on driving portfolio and market reach: The companies have focused on expanding their portfolio and market presence through strategic partnerships, acquisitions, and store expansions. Players in this space have also focused on research and development to introduce products that can be easily cooked at home and develop formulations that are low in preservatives, without compromising flavors. Plant-based, gluten-free and keto-friendly food products are gaining prominence. Companies have increased production capacity to meet the growing demand for fresh and organic produce. Several companies in the natural foods industry have benefited from increased e-commerce sales due to the growing inclination of consumers towards online shopping. As a result, companies are investing more in digital transformation, including online product offerings, delivery systems, and marketing.
Concerns about escalated costs: Commodity cost inflation is a concern for several players in the natural foods industry. The prices of raw materials such as cooking oil, vegetables, dairy products and animal feed have been increasing. In addition, companies have witnessed high costs associated with operations amid the pandemic, such as an increase in employee pay to meet healthcare needs, as well as costs related to sanitizing and safety measures. Supply chain setbacks in some markets have also led to higher warehousing, packaging and other logistics expenses. That being said, companies have been taking initiatives to mitigate cost-related challenges. These include streamlining operating structures, optimizing manufacturing capacity and supply networks, as well as adopting effective pricing policies.
Zacks Industry Rankings Indicate Great Prospects
The Zacks natural foods industry is within the broader Zacks wholesale and retail sector. The industry currently has a Zacks Industry Rank of #61, which places it in the top 24% of more than 250 Zacks industries.
The group’s Zacks Industrial Rank, which is basically the average of the Zacks Rank of all member stocks, indicates bright near-term prospects. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of industries ranked by Zacks is the result of a positive earnings outlook for the constituent companies as a whole. Looking at revisions to the aggregate earnings estimate, it appears that analysts are gradually gaining confidence in the earnings growth potential of this group. Since early August 2022, the industry’s 2022 earnings estimate has improved by 5.9%.
Given the industry’s strong outlook, here are some stocks you may want to consider for your portfolio. But before that, it’s worth taking a look at the industry’s performance and current valuation.
Industry vs. wider market
The Zacks Natural Foods Industry has outperformed the broader Zacks Wholesale and Retail sector, as well as the Zacks S&P 500 over the past year.
The industry has gained 19.4% during this period in contrast to the overall sector’s decline of 29.4% and the S&P 500’s decline of 16.4%.
One Year Price Performance
Current Industry Valuation
Based on the 12-month price-earnings (P/E) ratio, which is commonly used to value retail and wholesale stocks, the industry is currently trading at 13.89X compared to the S&P 500 of 17.81X and the sector of 21.74X. .
Over the past five years, the industry has traded as high as 20.31X and as low as 11.82X, with a median of 16.54X, as the chart below shows.
Price-earnings ratio (last 5 years)
3 natural food reserves to keep a close eye on
Sprout farmers: This Zacks Rank #2 (Buy) company has benefited from its initiatives focused on product innovation, customer experience, and targeted marketing with great pricing and technology every day. This well-known grocery retailer is constantly expanding its presence in the natural organic space, given the high demand in the segment. Sprouts Farmers has been strengthening same-day delivery capabilities as well as pickup services at all stores. Certainly, SFM’s focus on enriching the omnichannel experience bodes well. The Zacks Consensus Estimate for Sprouts Farmers profit and sales for the current fiscal year suggests growth of 4.6% and 9.5%, respectively, over the figure reported in the same period last year. . The consensus mark for earnings implies a 3.1% jump over the last 30 days. Sprouts Farmers shares are up 22.3% in a year.
You can see Full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SFM
Performance Food Group: The company has been making product innovations and acquisitions to increase market share. The acquisition of Core-Mark benefits Performance Food, which is engaged in the distribution and marketing of food and food-related products. In addition, PFGC’s efficient sales prices amid rising cost inflation have been an advantage. In particular, the Zacks Consensus Estimate for Performance Food’s current fiscal year profit and sales indicates an increase of 43.1% and 14.4%, respectively, over the figures reported for the prior year. The consensus mark for earnings implies a jump of 10.7% in the last 30 days. Shares of this company ranked #2 by Zacks have risen 31.7% in the past year.
Price and Consensus: PFGC
SpartanNash: Shares of this Zacks Rank #3 (Hold) company are up 29.7% in one year. SpartanNash benefits from a focus on its People First culture, achieving operational excellence and serving customer needs. Efficient pricing is also working well for SPTN, which is a food solutions company. The Zacks Consensus Estimate for SpartanNash’s top and bottom results for the current fiscal year suggests growth of 7.4% and 38.8%, respectively, over the number reported in the prior-year period. The consensus mark for earnings implies a jump of about 4% over the last 30 days.
Price and Consensus: SPTN
Want the latest recommendations from Zacks Investment Research? Today you can download the top 7 stocks for the next 30 days. Click for this free report
Performance Food Group Company (PFGC) – Free Stock Analysis Report
SpartanNash Company (SPTN) – Free Stock Analysis Report
Sprouts Farmers Market, Inc. (SFM): Free Stock Analysis Report
To read this article on Zacks.com, click here.
Zacks Investment Research