Rising at-home cooking and dining trends amid the ongoing COVID-19 pandemic has brightened up things for the Zacks Natural Foods Products industry. Moreover, companies in this space are boosting their portfolio strength through prudent innovations and partnerships. A few players are also witnessing higher online sales and are investing more on boosting digital capabilities. Continuation of such upsides are likely to benefit industry participants like Performance Food Group Company (PFGC), Sprouts Farmers Market, Inc. (SFM) and SpartanNash Company (SPTN).
However, rising input costs have made matters difficult for some of the companies in the natural food products space. Also, higher distribution and logistics expenses as a result of operating amid the pandemic has been a drag.
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
Impact of COVID-19 on Demand: The coronavirus pandemic has led to an increase in at-home food consumption, as consumers increasingly prefer to cook and dine amid the safe environment of their own homes. This has led to increased demand for food-related items, including natural and organic food offerings. In fact, natural food products that offer health benefits and boost immunity are witnessing higher demand. Moreover, companies in the natural food products space are benefiting from stock hoarding, as consumers are reducing the frequency of their shopping trips to maintain social distancing. Backed by such trends, natural food product players are gaining from increased demand at retailers, grocery chains as well as independent stores. However, some companies are facing challenges associated with weak demand from foodservice clients like restaurants and cafes. Also, industry experts believe that at-home consumption rates are likely to moderate in the forthcoming periods as outdoor dining slowly picks up pace.
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. Moreover, consumers’ growing inclination toward online shopping have led to increased 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.
High Input Costs a Hurdle: Commodity cost inflation is a concern for a number of industry players. Prices of commodities like dairy items, eggs, animal feed and edible oils have been rising. Moreover, companies are lately witnessing high costs associated with operating 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.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Natural Foods Products industry is housed within the broader Zacks Retail - Wholesale sector. The industry currently carries a Zacks Industry Rank #100, which places it in the top 39% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident in this group’s earnings growth potential. Since the beginning of May 2020, the industry’s earnings estimate for 2020 has improved 65%.
Given the encouraging 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 underperformed the S&P 500 composite as well as the broader Zacks Retail – Wholesale sector over the past year.
The industry has gained 5.5% over this period compared with the S&P 500’s rise of 15.3%. Meanwhile, the broader sector has rallied 39.5% 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 17.31X compared with the S&P 500’s 22.54X and the sector’s 31.28X.
Over the past five years, the industry has traded as high as 21.78X and as low as 20.5X, 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: This Zacks Rank #1 (Strong Buy) stock has been gaining from rising independent case volumes as well as the acquisition of Reinhart Foodservice, LLC. The company’s convenience food channel has also been performing well. Performance Food is on track with product innovations to boost market presence. Recently, it launched the Green Origin brand, which is a proprietary line of plant-based protein products. Additionally, the company is committed toward cost management efforts. The Zacks Consensus Estimate for fiscal 2021 earnings has risen 9.3% in the past 30 days. We note that shares of this Richmond, VA-based distributor of food and related products have gained 1.4% in a year. You can see the complete list of today’s Zacks #1 Rank 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 also been on track with lowering operational complexity, optimizing production and improving in-stock position. Shares of this Zacks Rank #3 (Hold) company have risen 2.1% in a year. Sprouts Farmers’ bottom line has outperformed the Zacks Consensus Estimate by 59.5%, on average, in the trailing four quarters. The Zacks Consensus Estimate for earnings for 2020 has improved 7.5% over the past 30 days. Moreover, this everyday grocery store, which specializes in fresh food offerings, has a long-term earnings growth rate of 9.2%.
Price and Consensus: SFM
SpartanNash Company: This Zacks Rank #3 company has been gaining from higher consumer demand across the Retail and Food Distribution segments. The company, which is a distributor and retailer of grocery products is also benefiting from a sturdy e-commerce channel. Additionally, management is on track with efforts to boost efficiency in supply chain as well as identifying opportunities to enhance product offerings. Markedly, shares of this Grand Rapids, MI-based company have gained about 46.6% in a year. SpartanNash’s bottom line has outperformed the Zacks Consensus Estimate by 30.5%, on average, in the trailing four quarters. The Zacks Consensus Estimate for earnings for 2020 has improved 0.4% in the past 30 days.
Price and Consensus: SPTN
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