Research firm Credit Suisse has raised its target prices and forecasts for most of the US packaged foods companies that it covers, noting that the spread of the coronavirus (COVID-19) has created “an unprecedented spike in demand” for a wide range of food products.
School closings, work-from-home arrangements, limited access to sit-down restaurants and the decision by several quick-service restaurant chains (including McDonald’s, Chik-fil-A and Starbucks) to shift to a to-go only model is expected to lead to more consumers seeking out packaged foods in the weeks ahead.
“Our view is that this represents a shift in food consumption demand, not just a pull-forward, because consumers will need to continuously restock their homes,” Robert Moskow, a research analyst with Credit Suisse, wrote in the March 18 report. “We expect food consumption to remain elevated over the next 12 months as consumers choose to keep eating food at home to save money, much like they did during the last three economic recessions in 1990, 2001 and 2008.”
Mr. Moskow said Credit Suisse sees a potential for 25% to 30% upside to packaged foods names from valuation multiple expansion. He said more value is likely to be assigned to the assets of the large processed food companies that operate highly-automated manufacturing facilities and vast distribution networks.
“We are approaching a scenario where consumers are restricted to their houses and just about every public venue shuts down except for grocery stores and pharmacies,” he said.
As the forecasts move higher, investors seeking a safe haven may trade packaged food companies’ stocks back up to historical highs, but Mr. Moskow said he is hesitant to predict how long the window will last.
To illustrate the potential impact of the COVID-19 outbreak on the packaged foods industry and help investors with modeling, Mr. Moskow said Credit Suisse developed a tool for estimating the incremental impact to food-at-home spending from the crisis.
The Credit Suisse model assumes that 25% of the US workforce will shift 50% of their spending on meals and snacks to at-home occasions for a period of four months. Mr. Moskow said this could translate to a 2.6% increase in food-at-home spending on an annual basis.
“We have increased our sales forecasts for food companies by only 1% to 2% because they have been growing at a slower rate than the overall food industry for the past several years, but this could prove conservative,” he said.
Providing a closer look at individual packaged foods companies, Mr. Moskow said Credit Suisse has upgraded Hershey Co. to “outperform.” The company doesn’t fit the profile of a pantry-loading stock, but Mr. Moskow said Credit Suisse likes its long-term profile for several reasons, including its ability to weather past economic recessions, its strong pricing power, its competitive advantages (recent investments in media, supply chain and category management) and a highly flexible balance sheet.
Meanwhile, Mr. Moskow sees more near-term upside for Campbell Soup Co., Conagra Brands, J.M. Smucker Co. and General Mills, Inc.
“We expect these stocks to move higher, but, in our view, they have too much exposure to structurally challenged categories and brands to generate much more than 1% growth longer term,” he said. “We believe categories like breakfast cereal and canned soup will have trouble hanging onto consumers once they go back to eating breakfast on-the-go and eating lunch at work. We might find these stocks more compelling at cheaper valuations, but the recent spike has propelled (Campbell Soup) and (General Mills) above their 10-year average P/E multiples. (J.M. Smucker) is cheaper, but investors need to take into account its volatile track record and below-peer sales growth profile.”
Mr. Moskow said Credit Suisse also likes the prospects of Mondelez International and Kellogg Co., but said the research firm is cautioning investors to wait until after the first quarter.
“We think the pull-back in Mondelez stock represents an attractive entry point, but it might be best to wait until after the company quantifies the impact of COVID-19 on its business in China and the risk of supply chain disruption globally,” he said. “We like Kellogg as well, but it is taking longer than we expected for Kellogg’s US cereal business to regain traction.”
Mr. Moskow said Credit Suisse expects financially-leveraged stocks like Conagra, Kraft Heinz Co., B&G Foods, Inc. and TreeHouse Foods, Inc. to remain under pressure until the financial markets stabilize and/or the companies demonstrate that they can generate stronger cash flow and speedier debt reduction.
“This may represent a compelling opportunity for investors more intrepid than us,” he said.
Of the financially-leveraged stocks, Conagra may be most compelling, Mr. Moskow said, noting that the company has been active in introducing a lot of new, on-trend products in the frozen category. Even so, Conagra’s activity on the innovation front may not be enough to offset its exposure to declining brands like Hunts and Chef Boyardee, he added.
By Eric Schroeder
Source: Food Business News
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