Food stocks stay resilient

John Baumgartner
John Baumgartner Senior Food and Healthy Living Equity Research Analyst
May 31, 2022

With the S&P 500 in a downward trend since the beginning of 2022, many investors are looking for stocks that may offer resilience in the face of a slowing economy and higher inflation. Consumer staples have historically been viewed as a defensive investment, and the food products industry, particularly companies that make snacks and nutritional supplements, could offer a growth opportunity in an otherwise slumping market in our view.

Despite higher prices, demand for food products has stayed strong. So far this year, stocks in the category are up 5%. While food products companies are still navigating supply issues, changes in consumer shopping habits could help drive continued growth.

Demand remains strong despite rising prices

Food products tend to be among the most resilient consumer staples. During recessions and periods of slow economic growth, on average, food stocks trade at a 35% premium above the S&P 500, on a P/E basis, compared to the 19% premium at present.

That said, the food products industry has had to adjust to challenging economic conditions. When COVID hit, almost every supermarket category saw double-digit demand growth as consumers prepared more food at home. With limited capacity, many companies turned to third-party manufacturers, which constrained profit growth, despite higher demand. As those supply issues began to resolve, the Omicron variant led to significant staffing shortages. 

Food companies are now facing new challenges from the war in Ukraine and a late start to planting in the US which are driving up commodity costs with the result that supermarket costs are up 10% year-over-year, with some categories seeing even higher inflation rates. 

Demand has remained strong however, even in today’s inflationary environment, with supermarket sales volumes essentially flat. Our proprietary April survey of food consumers showed that shoppers are reacting to higher inflation by cutting back on restaurant spending and other discretionary products (home furnishings, electronics). Consumers are adjusting their grocery shopping patterns, reducing spending in the outside aisles of the supermarket—meats, dairy and produce—and increasing spending at the center of the store - prepared food products, canned goods and supplements. 

Mondelez’ Snack Growth To Accelerate From Investment In New Products and Local Brands

Global snack giant, Mondelez (MDLZ), is poised to benefit from these consumer trends in our view. The snack company could see growth accelerate as it reinvests in local brands and introduces new products. 

Shoppers have been moving to grazing rather than eating full meals, which can benefit snack makers such as MDLZ. The company also continues to innovate, its Choco-bakery category is combining candy and baked goods in new products, such as combinations of cakes and Oreos. These new products are being rolled out in Europe and India, and eventually will be introduced to North America. 

Mondelez could also take advantage of white space distribution potential, leveraging its existing chocolate channels to grow sales of cookies and other products. The company has focused on global brands, but as it reinvests in local snack brands, it should gain market share. Financials may also benefit from closing factories and restricting back-office services, which could save more than $600 million in costs. 

Consensus estimates for MDLZ forecast 3.7% revenue growth CAGR between 2022E-2025E, however we believe it could exceed that at 4.5%. We also believe earnings growth could potentially reach double digits. Meanwhile, the stock trades at a 15% discount to other global staples names such as P&G and Coke. 

BRBR and SMPL To Benefit From Continued Growing Demand For Nutrition Products 

The consumer focus on nutrition and health has been driving strong growth in a number of product categories, especially performance nutrition shakes, healthy snacks, and protein and nutrition powders, which saw sales growth rates as high as 20% in 2020 and 2021. BellRing Brands (BRBR) and Simply Good Foods (SMPL) are two food companies positioned to benefit from this growing demand in our view. 

BellRing Brands’ product portfolio includes leading protein powders Premier and Dymatize, and the company could benefit from increased production capacity and product innovation. There is approximately $3 billion of potential revenue in adjacent health nutrition categories where the company doesn’t currently compete—such as in gender or life-stage specific products, and functional products with caffeine. 

Simply Good Foods’ Atkins and Quest Nutrition brands are also poised to benefit from health and wellness trends. The company’s healthier snack products appeal to consumers looking for higher protein and lower carb options. As sugar increasingly is viewed as a public health issue, the company will benefit from product innovation and a sustained appeal for low-sugar options. 

This combination of favorable consumer trends and product innovation can strengthen the position of companies with strong brands—like Mondelez, BellRing Brands, and Simply Good Foods—even as rising inflation and the risk of an economic downturn affect other consumer staples stocks. 





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