Food stocks are worth a nibble after their worst showing relative to the
S&P 500
in more than 20 years.
The sector, known for its stability, isn’t supposed to make investors queasy, but that’s exactly what it has done this year. It’s down 10% in 2023 as measured by the packaged-food group of the S&P 500, against a 16% rise in the index—and the poor performance has come entirely since May.
Stocks like Kellogg (ticker: K),
General Mills
(GIS),
Kraft Heinz
(KHC),
Conagra
Brands (CAG), and
Campbell Soup
(CPB) are off 15% to 25% in 2023, and a few are back where they stood 10 years ago—or even lower.
Why bother with the normally stodgy sector? For starters, valuations have come down and look reasonable. Kraft Heinz and Conagra trade for about 11 times projected current year earnings. Kellogg, General Mills, and Campbell fetch around 14 times earnings—a nice discount to the S&P 500’s roughly 19 times.
Dividends are ample and look well-covered by earnings, too. Many food companies sport dividends ranging from 3.5% to nearly 5%, while the average dividend payout ratio is around 50%. Leverage ratios are at multiyear lows, leaving more room for higher dividends or stock buybacks.
The timing may also be right. Over the past 50 years, defensive food stocks have tended to outperform the market in the final four months of the year, says Stifel analyst Matthew Smith, as portfolio managers look to protect gains from earlier in the year. Like clockwork, food stocks held steady this past week as tech shares pulled back.
There are reasons food stocks have fallen out of favor, of course. Wall Street analysts, who are decidedly lukewarm on the sector, cite declining sales volume, private-label competition, sluggish profit outlooks, and higher interest rates as reasons to think twice about investing in the group.
Though many companies target annual earnings-per-share growth of 6% to 8%, achieving that consistently has been tough, and many investors are skeptical about whether that goal is widely achievable. Sharply higher food prices have also cut into sales volumes, which are down in the mid-to-high single digits industrywide this year following a sharp surge during Covid.
Another issue is “Ozempic risk,” namely that the explosive growth of effective diet drugs like
Novo Nordisk
’s
(NVO) Ozempic and
Eli Lilly
’s
(LLY) Mounjaro will curb outsize American appetites. The Ozempic impact can’t yet be quantified, writes J.P. Morgan analyst Ken Goldman, and that hasn’t helped the stocks, since investors fear the worst. And even dividend yields of 4% don’t look as compelling in a world of 5% short-term rates.
That doesn’t mean shunning all the stocks, and certainly not at these valuations. It just means being careful. “Investors need to be selective with food exposure,” says Stifel’s Smith.
Here’s the case for some of the leading food companies:
•
Mondelez International
(MDLZ). With a market value of $95 billion, Mondelez is the most valuable food company and the star of the group. It has one of the better growth outlooks and a premium valuation at around 21 times projected 2023 earnings, one that puts it on par with
Coca-Cola
(KO) and
PepsiCo
(PEP).
Mondelez dominates cookies with Oreo and other Nabisco products, and it’s just behind Mars globally in chocolate with Cadbury, Milka, and other brands that are mostly sold outside the U.S. It gets about one-third of its sales from high-growth emerging markets.
“Mondelez is growing volumes when most peers are seeing declines,” says Smith. The company sees 12%-plus growth in organic net revenue and earnings per share this year, one of the best showings in the industry.
Smith, citing “a strong and accelerating growth outlook,” has a Buy rating and $86 price target on Mondelez, up 22% from Thursday’s close of $70.
• Kraft Heinz. It’s Warren Buffett’s favorite food stock—
Berkshire Hathaway
(BRK.A) owns 26% of the company—but it hasn’t been a great investment. Shares, at around $33, trade for less than half of where they were in 2015, when Kraft merged with a private Heinz, then half-owned by Berkshire.
The company, which makes Kraft Macaroni & Cheese, Jell-O, and Heinz ketchup, has moved away from the cost-containment strategy that it had implemented in 2015.
“Since 2018, it has shifted course and focused on marketing, innovation, and improving the balance sheet,” says Erin Lash, a Morningstar analyst.
Kraft won’t wow anyone with its growth. Its earnings are expected to increase by just 4% this year to $2.90 a share and by 3% in 2024 to almost $3 a share. Still, its $1.60 annual dividend, which has been unchanged since 2019, looks increasingly secure as debt levels have come down.
Berkshire values its stakes at $40 a share for accounting purposes, up 22% from Thursday’s close.
• Kellogg. It plans to split into two companies in the fourth quarter, executing a plan unveiled last year.
The larger Kellanova will hold the global snack-food franchise, including Pringles and Cheez-Its, and other businesses, including food service. WK Kellogg will control the sluggish cereal operations led by Frosted Flakes, Special K, and Froot Loops.
Kellogg is hoping that Kellanova, which may account for over 90% of the value of the two companies, gets treated less like its slow-growth food peers and more like Mondelez, which owns Nabisco cookies, or PepsiCo, which holds the dominant Frito-Lay snack business.
Wall Street isn’t convinced. Kellogg is valued at 14 times projected 2023 earnings, well below Mondelez and PepsiCo. If Kellanova can deliver 7% to 9% annual earnings-per-share growth, in line with the Mondelez target, the stock could appreciate.
Spin-Off Research’s Joe Cornell values Kellanova at $68 a share (assuming a discount to Mondelez) and $4.50 a share for WK Kellogg for a total value of $72.50, up more than 20% from a recent $59.37.
• General Mills. The company, whose brands include Cheerios, Haagen-Dazs, and Pillsbury, has been pressured this year by weaker volume trends. Growth has slowed at its formerly robust Blue Buffalo pet business and profit gains have moderated.
General Mills recently updated guidance for the current fiscal year. It now sees 4% to 6% growth in earnings per share, at the low end of its mid- to high-single-digit target range. Still, the company raised its dividend by 9% in August, resulting in a 3.6% yield.
The shares, at around $65, trade reasonably, at about 14 times projected earnings in the fiscal year ending in May 2024. “The company is in some attractive categories,” says Stifel’s Smith, citing pet food, yogurt, ice cream, and food service. He has a Buy rating and price target of $72, up 11%.
• Campbell Soup. The company was hoping its recent $2.7 billion deal to buy the high-growth
Sovos Brands
(SOVO), known for its $10-a-jar Rao’s pasta sauce, would excite Wall Street, but its stock is down about 7% to a recent $42. Investors don’t seem to think the deal was worth the price—over 30 times 2023 earnings—or the debt that Campbell will incur, which will boost its leverage ratio to one of the highest among its peers.
Still, it’s easy to see why the company felt the need to do something. Campbell recently guided to 3% to 5% growth in earnings per share in its fiscal year ending in July 2024, while its dividend—the stock yields 3.5%—hasn’t been increased since 2020.
The stock is now back where it traded a decade ago, and it looks like it may be bottoming at 14 times projected 2023 earnings—a historically wide discount to peers.
There’s still a lot to like about Campbell, including its higher-growth snack business led by Pepperidge Farm, the maker of Goldfish and Milano cookies. Consumer Edge Research analyst Connor Rattigan likes Campbell, arguing that the snacks business, particularly Goldfish, is attractive.
• Conagra Brands. It’s one of the cheaper stocks in the sector but also has a problematic portfolio.
The maker of Birds Eye, Duncan Hines, and Slim Jim offered weak guidance in July for its fiscal year ending in May 2024, including earnings of $2.70 to $2.75 a share, down from $2.77 in the just-completed year. Conagra called it a “transition” year and reaffirmed its long-term target of mid- to high-single digit annual earnings growth.
Analysts have their doubts. They worry that Conagra is a candidate for higher promotional spending, which could hit profits. Despite hefty debt, Conagra recently boosted its dividend by 6% to an annualized $1.40 a share, resulting in a yield of 4.8%.
Conagra, though, is dirt cheap: At around $29, its stock trades for little more than 10 times projected earnings of $2.73 a share.
Write to Andrew Bary at andrew.bary@barrons.com
