4 Food Stocks to Keep an Eye on as Industry Trends Appear Rosy

The Zacks Food-Miscellaneous industry participants have been benefiting from their emphasis on product innovation and portfolio enhancement to meet evolving consumer tastes and preferences. Additionally, robust pricing initiatives have been helping food players counter cost inflation.
While a dynamic consumer landscape has been weighing on volumes, food players have been adopting strategies to address these challenges through initiatives like value-based marketing and promotional activities. These upsides keep Mondelez International, Inc. MDLZ, Conagra Brands, Inc. CAG, Lamb Weston Holdings, Inc. LW and Ingredion Incorporated INGR well-placed for growth.

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 and 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 mainly through wholesalers, distributors, large retail organizations, grocery chains, mass merchandisers, drug stores and 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

Refining Portfolio & Strengthening Brands: The strength of well-established brands has been a significant advantage for food companies, driving consumer loyalty and promoting growth. This loyalty, combined with a relentless focus on innovation, has been instrumental in maintaining competitive edges. For instance, as consumer demand for healthier, more nutritious food options increases, companies have responded by introducing innovative organic products and expanding their offerings in the health and wellness space. Beyond product innovation, efforts to enhance manufacturing capabilities and diversify product portfolios have proven highly successful. These strategies have not only bolstered current market positions but also set the stage for future growth by ensuring these companies are well-equipped to adapt to evolving consumer preferences and shifting market dynamics. The ability to adapt to evolving consumer preferences and market dynamics has emerged as a winning formula.
Proactive Pricing Endeavors: Effective pricing strategies have provided a crucial buffer for food companies amid the challenges of industry-wide cost inflation. As the demand for food products remains relatively stable, consumers generally absorb the increase in prices for their preferred brands. This pricing power is a testament to the brand strength and consumer trust. We believe that maintaining a competitive yet strategic pricing approach will continue to benefit food companies, helping them sustain their revenue streams and enhance overall performance.
Cost-Related Challenges: The rising cost of key ingredients, coupled with high labor, packaging, and logistics expenses, has impacted profit margins. Furthermore, companies are incurring increased operational expenses as they invest in improving performance, enhancing efficiency, and expanding capabilities. These investments, while necessary for long-term growth, contribute to the current financial strain. The persistence of these elevated costs poses an ongoing challenge to profitability. To mitigate these impacts, companies have been exploring cost-saving measures, supply chain optimization, and strategic sourcing initiatives.
Tough Operating Landscape: Food companies have been operating amid a volatile macroeconomic environment. Inflation has eroded consumer purchasing power, leading many to seek budget-friendly alternatives and shift from well-known brands to private-label products. This shift has adversely affected the sales volumes of several major food companies. Companies have been adapting their strategies to address these challenges through initiatives such as value-based marketing, promotional activities, and expanding lower-priced product lines.

Zacks Industry Rank Indicates Bright 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 the average of the Zacks Rank of all the member stocks, indicates rosy 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.
Let's take a look at the industry's performance and current valuation.

Industry vs. Broader Market

The Zacks Food-Miscellaneous industry has underperformed the S&P 500 as well as the broader Zacks Consumer Staples sector over the past year.
The industry has declined 10.3% over this period compared with the S&P 500's growth of 16.1%. Meanwhile, the broader sector has dropped 4.9% in the said time frame.

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 15.75X compared with the S&P 500's 20.54X and the sector's 17.32X.
Over the past five years, the industry has traded as high as 20.9X and as low as 14.42X, with the median being at 18.07X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Food Stocks to Keep a Close Eye On

Conagra Brands: This Zacks Rank #2 (Buy) company continues to be driven by innovation and brand-building, witnessing market share gains in the frozen category. Conagra maintains its focus on investing in innovation, considering it the primary asset in its strategic approach and essential for enhancing its brands and fueling sustainable growth. The strength of the frozen category reflects the forte of the company's brands and the effective execution of the Conagra Way playbook.
The Zacks Consensus Estimate for Conagra's current fiscal-year earnings per share has remained unchanged at $2.63 in the past 30 days. Shares of CAG have gained 2% in the year-to-date period.

Price and Consensus: CAG

Lamb Weston: The manufacturer of value-added frozen potato products has been gaining from efforts to boost offerings and expand capacity, as it helps the company to meet rising demand conditions for snacks and fries effectively. Lamb Weston's efforts to counter input cost inflation through effective pricing actions have been proving beneficial. Additionally, this Zacks Rank #2 company has been making investments to boost supply-chain, commercial and information technology operations.
The Zacks Consensus Estimate for Lamb Weston's current financial-year EPS has remained unchanged at $5.54 in the past 30 days. Shares of LW have plunged 19.6% year to date.

Price and Consensus: LW

Ingredion Incorporated: This Zacks Rank #2 company looks well-positioned due to its market and product diversity and robust business model. An efficient approach to product pricing, a favorable customer mix and a focus on driving operational excellence and productivity have been aiding the company in battling cost inflation. Ingredion Incorporated's focus on Driving Growth Roadmap also bodes well.
The company, which produces and sells sweeteners, starches, nutrition ingredients and biomaterial solutions, has seen its stock price climb 6% year to date. The Zacks Consensus Estimate for INGR's current fiscal-year EPS has remained unchanged at $9.76 in the past 30 days.

Price and Consensus: INGR

Mondelez International: The company, which has been witnessing solid organic revenues, has been benefiting from strength in emerging markets and its core chocolate and biscuit categories. This Zacks Rank #3 (Hold) company has also been focused on strengthening areas with higher growth potential via prudent buyouts (like Ricolino and Clif Bar) and divestitures.
Continuous reinvestments in its brands and capabilities, along with impressive revenue growth management and portfolio reshaping efforts, place Mondelez well for future growth. The Zacks Consensus Estimate for MDLZ's current-year EPS has decreased by a penny to $3.49 in the past seven days. Shares of this snack food and beverage biggie have tumbled 6.7% in the year-to-date period.

Price and Consensus: MDLZ

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