Deutsche Bank sees opportunity for food companies in 2020. The firm announced Dec. 11 that it would be resuming coverage across 13 large-cap food companies.
Powers noted favorably disposition despite the Hold ratings on Hershey (HSY), Campbell Soup (CPB), Mondelez (MDLZ), McCormick (MKC) and Hostess Brands (TWNK). Meanwhile, he has Hold ratings and a wait-and-see approach for Kraft Heinz (KHC), J.M. Smucker (SJM), Conagra Brands (CAG) and Flower Foods (FLO).
Powers gave General Mills a $61 price target, representing an 18% move higher from Thursday’s closing price. “We see an underappreciated runway in Pet (Blue Buffalo) beyond 2019 and overdone concerns in cereal/yogurt unfairly challenging the stock's current valuation (15.5x); as Pet trends are validated and cereal/yogurt trends surpass fears, we expect a positive re-rating.”
Kellogg’s snack business looks favorable and the U.S. cereal business could improve in 2020, according to Powers. His price target of $74 implies about 11% upside for the stock. “We see investor focus on K's developed market cereal business (~25% of company sales) underestimating the relative strength and optionality of K's businesses in snacking and emerging markets—even as we believe US cereal is well-positioned to improve in CY20.”
Despite Simply Good Foods stock’s strong run this year, and especially over the past month, Powers thinks it is a Buy at current levels and has more room to run. “In our view, [Simply] is well positioned to grow in a category which is benefiting from consumer tailwinds around health & wellness and convenience. The Atkins brand has repositioned itself toward a lifestyle brand, and we see the Quest acquisition as complementary.”
Even as Powers resumed coverage of the big consumer packaged goods (CPG) companies, he noted that in general, he believes food companies grow slower and are more exposed to competition from private label and small brands. In addition, CPG companies have more complex portfolios and are thus more prone to SKU, stock-keeping unit, proliferation or fragmentation.
“That said, today's relative discount (17.5x for Food) seems to us still slightly exaggerated. As a result, we do see pockets of Food opportunity heading into 2020,” Powers explained.
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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