Food stock pickings are called slim ahead of a potential cyclical downturn
Hispanolistic
Cowen warned on Wednesday that the packaged food sector is in the early stages of a sharp downturn due to factors such as weakening elasticity of demand from supply chain normalization, the risk of price discounting, and margin pressures.
The cautious stance is due to the view that a majority of food companies have raised prices too high on structurally challenged brands and now face a formidable cyclical downturn. Analyst Robert Moskow said that in a challenging cycle, the firm steers toward high quality companies with must-have brands in advantaged categories with pricing power or takeout potential. Mondelez International (NASDAQ:MDLZ) earned an Outperform rating from Cowen and was called a Top Pick due to strong developing markets exposure and with significant investments to grow distribution. J.M. Smucker (NYSE:SJM) was also slotted at Outperform and named a Top Pick as the firm's most out-of-consensus call. "We think the market under- appreciates the transformation of its commercial model, above-peer growth, and the Hostess acquisition," advised Moskow. The firm was positive on companies with strong positions in indulgent snacking and French fries. That list included Hershey (NYSE:HSY), Utz Brands (UTZ), and Lamb Weston (LW) - which all were tagged with Outperform ratings. Freshpet (FRPT) was also started off with an Outperform rating. In terms of valuation, Moskow pointed out that Hershey (HSY), Mondelez (MDLZ), Utz Brands (UTZ), and Hostess Brands (TWNK) trade at 22X P/E or higher and grow 3% to 5%. However, the bull case is based on their pricing power in categories with expandable consumption, and track record of creating shareholder value over time.
On the negative side, Kraft Heinz (KHC), Conagra Brands (CAG), and B&G Foods (BGS) are said to face the biggest structural challenges and are noted to have the weakest near-term sales trends. BGS was rated at Underperform by Cowen, while KHC and CAG were rated at Market Perform. Beyond Meat (BYND) was lined up at Underperform due to its fragile financial condition. Notably, Cowen's proprietary consumer survey found that taste is the key obstacle to trial - not price or health benefits. Further sales declines are anticipated for BYND. General Mills (GIS), TreeHouse Foods (THS), Kellogg (K), and Vital Farms (VITL) all were started off with Market Perform ratings on the expectation for sluggish earnings reports in the near term.
CPI check: Food prices rose 4.3% year-over-year in August and edged up 0.2% month-over-month as inflation proved sticky in the sector. Food at home prices were 3.0% higher, while food away from home prices rose 6.5%. Overall, CPI rose 3.7% year-over-year in August vs. the consensus mark of 3.6% and the 3.2% pace in July. The biggest concern in the food sector is if consumers pull back or trade down to pressure the ability of companies to keep up with their inflation costs. Food categories that showed prices higher in August than a year ago included cereal (+4.3%), beef and veal (+6.3%), cookies (+8.5%), apples (+8.5%), frozen vegetables (+14.7%), candy and chewing gum (+9.4%), and salad dressing (+12.1%). Categories with prices lower than a year ago, included bacon (-6.4%), eggs (-18.2%), and milk (-3.5%).

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