Miscellaneous Food Industry Outlook: Costs Raise Concerns

The Zacks Food-Miscellaneous industry consists of companies manufacturing and selling cereals, natural and organic products, bakery items, spices and condiments, frozen items and a wide range of packaged food delicacies. Some companies also provide comfort food items such as chocolates as well as ready to serve meals, soups and snacks. Firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations and grocery chains.

Let's take a look at the industry's three major themes:

  • Rising input costs are a lump in the throat for the miscellaneous food industry. In this respect, high freight expense is a significant worry. Tight trucking capacity stemming from driver shortages is a prime culprit behind raised freight costs. Moving on, inflationary trends for supplies like edible oils, vegetables, dairy items as well as animal feed, to name a few, have also raised the cost burden. Companies in the food space that operate internationally, are also bearing the brunt of higher tariffs stemming from U.S.-China trade war on food items such as soybean and pork.

  • Food companies are streamlining their operational structure to enhance savings. Efforts in this context include optimization of manufacturing capacity and supply networks as well as adherence to financial management techniques like zero-based budgeting. Moreover, companies are indulging in efficient pricing to strike a balance between volumes and profits.

  • Some of the industry participants are engaged in frequent portfolio refinement, through strategic buyouts and divestitures of non-core elements. In fact, a number of miscellaneous food companies are also enriching their portfolio by adding more natural and organic foods to keep up with consumers' growing inclination for healthy offerings. No wonder, companies are adopting digital marketing techniques and pushing sales through e-commerce channels.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Food-Miscellaneous industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #165 which places it at the bottom 36% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group's earnings growth potential. Over the past year, the industry's earnings estimate for 2019 has declined nearly 10.6%.

Despite the dull scenario of the industry, we will present a few stocks that one can buy or retain, given their solid growth endeavors that has helped them tide over the blues. But before that, it's worth taking a look at the industry's shareholder returns and current valuation.

Industry Lags on Stock Market Performance

The Zacks Food-Miscellaneous industry has lagged the Zacks S&P 500 composite over the past year, while the industry's performance remained almost in-line with the broader Zacks Consumer Staples sector.

The industry has declined 16.7% over this period, as compared with the S&P 500's decline of 5%. Meanwhile, the broader sector has fallen roughly 16.5%.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing consumer staples stocks, the industry is currently trading at 17.13X compared with the S&P 500's 17.09X and the sector's 19.18X.

Over the past five years, the industry has traded as high as 25.27X, at the median of 21.45X, and at a low of 17.13X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

While there is no denying that companies in the Food-Miscellaneous industry are reeling under escalating commodity and freight expenses, endeavors to boost profitability are helping many of them to stay afloat.

That said, we are presenting three stocks, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

McCormick & Company, Inc. (MKC), a renowned name in spices and seasonings, has gained as much as 38.9% in a year. The company has an estimated long-term earnings growth rate of 9%. It has outperformed the Zacks Consensus Estimate by an average of 5.2% in the trailing four quarters. Markedly, McCormick's consensus EPS estimate for the current fiscal year has been stable over the last 30 days.

Price and Consensus: MKC

Campbell Soup Company (CPB) has an estimated long-term earnings growth rate of 5.5% and has an average positive earnings surprise of 13.6% for the last four quarters. The company's consensus EPS estimate for the current fiscal year has been stable over the last 30 days.

Price and Consensus: CPB

Investors can also count on Lamb Weston Holdings, Inc. (LW), which boasts stellar bottom-line surprise history. Encouragingly, this frozen potato products supplier's shares have rallied 21.5% in a year. The company carries a long-term EPS growth rate of 11.8%. Moreover, its consensus EPS estimate for the current fiscal year has improved over the last 30 days.

Price and Consensus: LW

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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