The food and beverage companies are facing headwinds from the shift in consumer purchase decisions, evolving shopping behavior and increasing presence of small firms. As the small companies are entering the market space, it is becoming tough for the existing players to retain their position.
Further, there has been a shift in consumer preference as they are more inclined toward the non-genetically modified, organic, and gluten free products. Also, there is an industry-wide weakness, as deflationary pressure in commodities such as dairy, beef and eggs are hurting the margins of food companies.
Though food companies are making aggressive efforts and channeling funds toward product and packaging innovation as well as reformulation of many existing products with more nutritional benefits; persistent headwinds like food deflation, stiff competition and aggressive promotional environment are expected to hurt the food grocers in the near term.
The not-so-impressive scenario in the food/grocery industry is evident from the fact that out of the 260-plus industries, the Food-Miscellaneous industry holds a Zacks Industry Rank #158. It falls in the middle one-third of all Industry Ranks, which signals that the outlook for the industry is 'Neutral.' We rank all the 260-plus industries in 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank .
Having said this, let's try to ascertain which of these two key food players - Conagra Foods, Inc. CAG and Ingredion, Inc. INGR , presently make for a better investment option in face of the headwinds plaguing the food industry.
Conagra Foods' market capitalization is $17.3 billion, while that of Ingredion is just $9.0 billion. Going by its business size, Conagra is better positioned over the long term owing to its massive scale of operations.
Let's delve into the details.
Our proprietary Zacks Rank, which is designed to predict price movements over the next one to three months, comes in handy in this scenario. Going by this metric, Westchester, IL-based Ingredion is a better bet as it carries a Zacks Rank #2 (Buy), highlighting the fact that this starches and sweeteners manufacturer is likely to outperform the broader market over the next one to three months. You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here.
On the other hand, Chicago, IL-based Conagra Foods carries a Zacks Rank #5 (Strong Sell), highlighting the fact that it is likely to perform in-line with the broader market over the next few months. In fact, we caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
The favorable Zacks Rank of Ingredion is primarily attributable to its focus on acquisitions. Favorable price/product mix across the portfolio, as well as the global optimization efforts is also contributing to margin expansion. We note that the company has delivered an average positive surprise in the past seven trailing quarters. Further, the company has raised its full year 2016 earnings guidance, owing to strong fundamentals.
On the other hand, in order to become a high-performing flexible company, Conagra successfully divested its Lamb Weston business in Nov 2016. However, at present, profit-making prospects of the company, post spin-off, are not clear to the market. Notably, the company's margins have always remained highly sensitive to the price changes of major raw materials, such as pork, oats, beef and wheat.
In addition, Conagra has been facing threats of business rivalry within the industry. Extensive competitive threats from peers raise the bargaining power of the company's customers, as well as increase threats of market-share loss. Further, the appreciating U.S. currency has been hurting the international revenues and profitability of Conagra, by enhancing the competitive power of the smaller rivals operating in low-cost nations.
Ingredion seems to outpace Conagra Foods on Style Score, as Ingredion's VGM score of 'A' is favorable than Conagra's VGM score of 'D.'
We note that the VGM score is a comprehensive tool that will allow investors to filter through the standard scoring system and choose better winning stocks. In order to screen out potential winning stocks, we consider only those that have a Zacks Rank #1 or #2 and a VGM score of 'A' or 'B.' Since Ingredion carries a Zacks Rank #2, along with a VGM score of A, we should consider it a favorable investing option.
The performance of the companies is well-reflected in the prices over the past one year. While shares of Conagra Foods have underperformed the Zacks categorized Food-Miscellaneous/Diversified industry, those of Ingredion have significantly outpaced the broader industry. Shares of Ingredion improved significantly by 34.7%, while Conagra Foods has slipped 4.8% since the past one year. The industry has advanced 9.5% since last year.
Upward estimate revisions are indicative of positive investor sentiment about a stock. The Zacks Consensus Estimate for Ingredion has increased 3.4% for full year 2016 and improved 2.3% for full year 2017 over the last 60 days. However, the same has gone down 31.1% for fiscal 2017 and 30.1% for fiscal 2018 over the last 60 days at Conagra Foods, rendering a doubt on the stock.
Ingredion's earnings in 2016 and 2017 are expected to grow by 20.1% and 8.5%, respectively. However, the scenario is not favorable for Conagra due to soft sales. Earnings per share are projected to contract 17.9% for fiscal 2017.
The above arguments clearly state that Ingredion is better placed currently and should offer great value to investors.
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