The food and beverage sector includes diverse groups of companies specializing in producing different foods and beverages such as specialty health foods, meat products, eggs, soft drinks, beer, and liquor. One metric that investors use to assess a company's relative value is the price-to-earnings ratio.
The P/E ratio is a relative valuation metric calculated as the current stock price divided by earnings per share. Depending on the EPS used in the denominator, the P/E ratio can be calculated based on EPS for the most recent 12 months or on analysts' projections for forward annual EPS. If the company generated negative earnings, the P/E ratio is meaningless. The P/E ratio constantly changes as the company's stock price and earnings change.
The overall goal of the P/E ratio is to value how attractive the cost of the stock is when compared to its earnings. It helps determine if the stock is in the investment or speculative category. A high P/E ratio would indicate a company that would provide high earnings, but could also be overvalued. A low P/E ratio can indicate a company without growth potential or a company that is undervalued.
The three largest food and beverage companies based on sales in 2019 are listed below with their P/E ratios as of Jan. 21, 2020.
|P/E Ratios of the Top 3 Food and Beverage Companies|
The average P/E ratio of an industry could be a misleading metric if the distribution of the P/E ratios within an industry is highly skewed. For example, using the top three companies as an example, Nestle's P/E ratio is significantly higher than the others. Since there are a few large outliers, the average P/E ratio represents a misleading relative value metric. Instead, analysts often calculate other measures such as median to assess the typical P/E ratio within the food and beverage sector.
The P/E ratio is an important metric in assessing the financial value of a company. What will help keep the food and beverage companies competitive and profitable, and therefore a good value, in 2020 and beyond will be the need to focus on key segments that are growing globally.
Plant-based burgers have been a successful product for food and beverage companies, catering to the growing number of vegetarians and vegans in the world. It's also been an important item for individuals who would like to reduce the amount of meat they consume. Given the popularity, consumers will continue to look for further options in plant-based meats that haven't had as much growth as burgers. Plant-based alternatives to chicken, fish, and pork will be areas to focus on.
Cannabis-based products will be another area important for growth. Despite regulatory difficulties, 2019 saw many new cannabis food and beverage products, but there is still a whole area to explore and grow. The general population's knowledge of cannabis products is still limited. Food and beverage companies will have to market and educate consumers on exactly what these products are, what the quality is, and why they should be buying them.
The success or failure of competing in this diversifying industry will impact earnings and the P/E ratio can help determine if the stock price is worth the value or not.