Zacks Food-Miscellaneous industry players are grappling with the high cost of inputs, packaging and logistics, which are likely to persist. A tight job market has also been making things difficult. Additionally, weak volumes and adverse currency movements have raised concerns for some companies.
However, food companies have been taking necessary pricing measures and simplifying operating structures to combat inflation. Additionally, the focus on innovation, product updates, and portfolio refinement to meet changing consumer tastes and preferences has worked well for companies like General Mills, Inc. NEXT, Conagra Brands, Inc. GAC, The J.M. Smucker Company SJM and Lamb Weston Holdings, Inc. L.W.
about the industry
The Zacks Food-Miscellaneous industry consists of companies that manufacture and sell a wide range of foods and packaged foods, including cereals, flour, sauces, bakery items, spices and seasonings, natural and organic foods, as well as frozen goods. Some of the companies also offer comfort foods like chocolates and ready-to-serve meals, soups, and snacks. Some players are in the business of providing pet food products and supplements. Several food companies also offer organic and natural products. 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 offer services to schools, hospitals and catering companies.
Main trends shaping the future of the food industry
Rising Costs: Food players have been dealing with input cost inflation for a while now. Several of the companies, in their latest earnings reports, stated that they expect input costs to remain high in the near term. We observe that the prices of raw materials such as soybeans, flour, cooking oil, vegetables, dairy products and animal feed, among others, have been increasing. Aside from this, supply chain hurdles have increased warehousing, packaging, and other logistics expenses. The increase in these expenses, coupled with a difficult labor market, has been affecting margins. That being said, companies have been focused on initiatives to mitigate cost-related challenges. These include streamlining operating structures, optimizing manufacturing capacity and supply networks, as well as adopting effective pricing policies.
Volume concerns: Some companies are also struggling with weak volumes due to lower product shipments. Certain companies expect sales volumes to continue to be hampered in the near term due to production and throughput constraints stemming from disruptions in the availability of key product inputs and spare parts.
Adverse currency movements: Several companies remain vulnerable to unfavorable currency movements due to their exposure to international markets. This is because a stronger US dollar may require a company to increase prices or squeeze profit margins at locations outside of the United States. Some industry players, such as General Mills and Conagra Brands, expect unfavorable currency fluctuations to affect their performance in the current fiscal year.
Refining portfolio to meet consumer needs: Food companies have been adopting product updates and innovations on a regular basis to meet the changing tastes and preferences of consumers. Additionally, with health and wellness gaining importance amid the pandemic, there has been a growth in demand for organic and natural food offerings. Several diverse food companies are enriching their portfolio by adding more natural and plant-based brands. Additionally, companies often engage in portfolio refinement through strategic acquisitions and divestitures of non-core items.
Zacks Industry Rankings Indicate Grim Outlook
The Zacks Diversified Foods industry falls within the broader Zacks Consumer Staples sector. The industry currently has a Zacks Industry Rank of #131, which places it in the bottom 48% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates dull 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 bottom 50% of industries ranked by Zacks is a result of the negative earnings outlook for the constituent companies as a whole. Looking at the revisions to the aggregate earnings estimate, it appears that analysts are losing confidence in the earnings growth potential of this group. Since the beginning of May 2022, the industry earnings estimate for 2022 has decreased by 8.8%.
Let’s take a look at the industry’s performance and current valuation.
Industry vs. wider 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 is up 2.3% over this period versus the S&P 500’s 17.2% drop. Meanwhile, the broader sector is down 5.1% in said time period.
One Year Price Performance
Current Industry Valuation
Based on 12-month P/E, which is commonly used to value consumer staples stocks, the industry is currently trading at 17.83X compared to 17.5X for the S&P 500. and 18.61X of the sector.
In the last five years, the industry has traded as much as 20.6X and as much as 15.08X, with a median of 18.03X, as the chart below shows.
Price-earnings ratio (last 5 years)
4 Food Reserves to Watch Closely
Weston Lamb: This value-added frozen potato products company has benefited from pricing actions in core business segments to offset rising input, manufacturing and transportation cost inflation. In addition, Lamb Weston has been interested in increasing production capacity to fuel long-term growth. The consensus mark for current fiscal year sales suggests growth of 14.6% over the figure reported for the prior year period.
The Zacks Consensus Estimate for Lamb Weston’s current fiscal year EPS has risen 8.6% over the past 60 days. LW has a long-term earnings growth rate of 26.9%. Shares of this Zacks Rank #1 (Strong Buy) company are up 38.5% in the past year. You can see the full list of today’s #1 ranked Zacks stocks here.
Price and Consensus: LW
General mills: The manufacturer and marketer of branded consumer foods has seen its shares rise 22.7% in the last year. The Zacks Consensus Estimate for General Mills’ current fiscal year earnings per share (EPS) rose 2.3% over the past 60 days. GIS has an earnings surprise in the last four quarters of 6.1%, on average. The consensus mark for current fiscal year sales suggests growth of 2.7% over the figure reported for the prior year period. GIS has a long-term earnings growth rate of 7.5%.
General Mills has benefited from its Accelerate strategy, which is highlighted by its key priorities. These include competing efficiently, investing in comprehensive margin management and strategic revenue management initiatives, and reshaping the portfolio. The company is also benefiting from its pet unit. Apart from this, General Mills’ savings and pricing actions have been helping her through cost hurdles. GIS currently ranks Zacks #2 (buy).
Price and Consensus: GIS
Conagra Brands: The constant focus on innovation, as well as recovery in the foodservice business, is working well for Conagra. In addition, the consumer packaged goods food company is on track with strong pricing actions in the face of rising cost of goods sold inflation. Conagra has a long-term earnings growth rate of 6%. The consensus mark for current fiscal year sales suggests growth of 5.2% over the figure reported for the prior year period.
This Zacks Rank #2 stock is up 8.1% in the past year. The Zacks Consensus Estimate for CAG’s current fiscal year EPS has risen 0.8% over the past 60 days.
Price and Consensus: CAG
The JM Smucker company: This Zacks Rank #2 stock is up 9.9% in a year. The manufacturer and marketer of branded food and beverage products has benefited from higher home consumption, especially for coffee. The strength of the Far From Home division and efficient pricing have also been advantages for The JM Smucker Company. SJM’s investments in growth areas such as the Uncrustables and Dunkin’ brands bode well.
The Zacks Consensus Estimate for The JM Smucker Company’s current fiscal year EPS has been flat for the past 30 days. SJM has a long-term earnings growth rate of 2.8%. The consensus mark for current fiscal year sales suggests growth of 4.5% over the figure reported for the prior year period.
Price and Consensus: SJM
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