The outlook for traditional food industry leaders continues to take a turn for the worse as Millennials choose alternative, healthier private labels and premium brands over the sugary cereals and sodas that once dominated their childhoods. While packaged food leaders scramble to buy up smaller rivals, revamp their product portfolios and implement major cost cutting initiatives, efforts have yet to propel the former leaders back to heights as their top line numbers reflect some of the slowest growth in decades. (See also: Major Trends Disrupting the Food Industry.)
Analyst Robert Moskow and his team at Credit Suisse lowered their revenue estimates for packaged food stocks Kraft Heinz Co. (KHC) and Pinnacle Foods Inc. (PF) below consensus estimates Thursday, highlighting concerns regarding an overall slowdown of branded food consumption.
Packaged Food Firms Have ‘Wiggle Room’
Despite the downbeat outlook regarding the industry as a whole, Credit Suisse reiterated an outperform rating on shares of Kraft, Pinnacle and The Hershey Co. (HSY), given they all have “wiggle room” in their forward guidance to meet earnings forecasts over next year. Moskow indicates all three stocks maintain a strong enough competitive advantage to “weather a difficult operating environment,” reports Barron’s.
In particular, the analysts foresee a likely pullback after Hershey’s upcoming earnings, as the chocolate maker’s valuation has historically relied on top line growth. Moskow believes this would be a strong opportunity to buy HSY on weakness, as the company’s earnings base is “poised for such a significant step-up in 2018 for the benefits of cocoa cost deflation and restructuring savings.”
“Unlike its food peers, Hershey competes in a structurally attractive category and remains committed to maintaining a high level of marketing investment to sustain revenue growth,” added Moskow. (See also: Bernstein Downgrades Food Industry Leaders.)