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3 Natural Food Stocks Worth a Look Despite Industry Headwinds

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·7 min read
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With the rollout of COVID-19 vaccines and outdoor dining gradually picking up pace, players in the Zacks Natural Foods Products are likely to witness demand moderation. The relatively reduced at-home consumption is expected to adversely impact sales. Also, rising input costs have made matters difficult for some of the companies in the natural food products space.

Nevertheless, companies in this space are boosting their portfolio strength through prudent innovations. A few players are also witnessing higher online sales and are investing more on boosting digital capabilities. Continuation of such upsides is likely to benefit industry participants like Performance Food Group Company (PFGC), Wm Morrison Supermarkets PLC (MRWSY) and Sprouts Farmers Market, Inc. (SFM).

About the Industry

The Zacks Natural Foods Products industry comprises companies that manufacture and sell organic and natural fruits, vegetables, dairy products as well as packaged ready-to-eat meals, snacks and frozen food. Some of these companies also offer items like ice cream, personal care products and health supplements. The firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations and grocery chains. Some of the players also operate through independent stores.

Major Trends Shaping the Future of the Natural Food Industry

Pandemic-led Demand Likely to Moderate: With COVID-19 vaccines being rolled out, people are gradually returning to the pre-pandemic lifestyle and opening up to outdoor dining. This is likely to result in relatively lower at-home food consumption and a drop in pantry loading. As a result, burgeoning demand, which several natural food products companies have been witnessing so far, is likely to slow down. Companies are expected to begin witnessing a drop in revenues sequentially, while year-over-year comparisons are also likely to be soft. Nevertheless, with outdoor dining slowly coming back into the picture, demand from restaurants and cafes are anticipated to pick up pace. As a result, some companies in the natural food products arena are likely to witness a revival in their foodservice business channels.

High Input Costs a Hurdle: Commodity cost inflation is a concern for a number of industry players. Prices of commodities like flour, dairy items, egg, animal feed and edible oils have been rising. Moreover, companies are lately witnessing high operating costs amid the pandemic like increased pay for workers and costs related to sanitization and safety measures. Moreover, increased logistics, warehouse and packaging expenses have raised the cost burden of industry players.

Focus on Boosting Portfolio & Market Reach: Companies in the natural food industry are striving to expand their portfolio and market presence through strategic partnerships, acquisitions and store expansions. Players in this space have also been focusing on research and development to introduce products that can be cooked easily and formulations that are low on preservatives, without compromising on flavors. In fact, the demand for fresh and organic products witnessed an increase during the pandemic, due to consumers increased focus on health. Moreover, consumers’ growing inclination toward online shopping has led to higher e-commerce sales for several companies in the natural food industry. As a result, companies are investing more toward digital transformation, including online product offerings, delivery systems and marketing.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Natural Foods Products industry is housed within the broader Zacks Retail - Wholesale sector. The industry currently carries a Zacks Industry Rank #173, which places it in the bottom 32% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since the beginning of December 2020, the industry’s earnings estimate for 2021 has declined 1.2%.

Despite the murky scenario, we will present a few stocks that one can buy or retain, given their solid growth endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry Vs. Broader Market

The Zacks Natural Foods Products industry has outperformed the S&P 500 composite as well as the broader Zacks Retail – Wholesale sector over the past year.

The industry has gained 95.9% over this period compared with the S&P 500’s rise of 53.5%. Meanwhile, the broader sector has rallied 52.1% in the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing Retail-Wholesale stocks, the industry is currently trading at 21.29X compared with the S&P 500’s 22.45X and the sector’s 30.17X.

Over the past five years, the industry has traded as high as 21.72X and as low as 12.5X, with the median being 17.73X as the chart below shows

Price-to-Earnings Ratio (Past 5 Years)

3 Natural Food Stocks to Keep a Close Eye on

Performance Food Group: The company, which is engaged in the distribution and marketing of food and food-related products, has been gaining from rising case volumes as well as the acquisition of Reinhart Foodservice, LLC. In fact, the buyout has been benefiting the company’s Foodservice unit. Performance Food has also been undertaking product innovations to boost market presence. Moreover, to provide better services, the company is expanding distribution centers. Additionally, the company is committed toward cost management efforts. Notably, the Zacks Consensus Estimate for fiscal 2021 earnings indicates a rise of 82.9% year over year. The consensus mark has remained stable over the past 30 days. Shares of this Zacks Rank #2 (Buy) company have surged 122.7% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: PFGC

Sprouts Farmers: This Phoenix, AZ-based company has been gaining from the coronavirus-induced demand spike for groceries. Also, its focus on product innovation, emphasis on e-commerce, expansion of private label offerings and enhancement of technology bode well. The company has been strengthening same-day delivery capabilities as well as pickup services across stores. The company has also been on track with lowering operational complexity, optimizing production and improving in-stock position. This Zacks Rank #2 stock has risen 50.6% in a year. The Zacks Consensus Estimate for earnings for 2021 has improved 4.5% over the past 30 days.

Price and Consensus: SFM

Wm Morrison Supermarkets: The company has been gaining from strong contributions across both retail and wholesale categories. A strong brand portfolio has been a key upside for the company. Moreover, it has been striving to boost brands, which offer higher nutritional value. Apart from this, this Zacks Rank #3 (Hold) company has been undertaking efforts to strengthen supply chain, reduce costs as well as enhance e-commerce capabilities. In fact, the company, with the help of prudent partnerships, has been strengthening omni-channel capabilities such as store pickups and same-day deliveries. The company’s shares have gained about 14.6% in a year. The Zacks Consensus Estimate for earnings in 2021 indicates a rise of 129.7% year on year.

Price: MRWSY

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