One fact always holds true, everyone needs to eat. For this reason, food stocks can make compelling investments as there will always be a demand. According to the Department of Agriculture, American consumers spend 10% of their disposable income on food. Not to mention the global food market offers an even larger opportunity, with its population about 20 times that of the U.S.
That’s not to say that all food stocks are created equal. J.P. Morgan analyst Kenneth Goldman notes that the competition has become more about potential to acquire new customers, strength in measured data and valuation. Based on this, he upgraded Beyond Meat (BYND) to a Buy, kept on Hold on Hershey (HSY) as well as bumped up the price target and downgraded McCormick (MKC) to a Sell.
Let’s take a closer look.
Buy: Beyond Meat Inc. (BYND)
Although shares are down 131% over the last six months, Goldman believes BYND should be on the menu upgrading the rating from a Hold to a Buy.
BYND has placed a strong focus on growing its customer base. In just the last month, Dunkin’ (DNKN), Blue Apron (APRN) and Taco Cabana have all announced the addition of Beyond Meat products to their menus.
Not to mention BYND’s Q2 net sales gained a massive 287% from last year reaching $67.3 million. Management attributed this growth to an increase in sales of the Beyond Burger, expansion in the number of retail and food service points of distribution and greater demand from existing customers.
Goldman also highlights its valuation as driving his more optimistic thesis. “With cash-on-hand likely to exceed $300MM by the end of 3Q, another guidance raise potentially ahead, and the stock 40% off its high, we think the stock is appealing once again,” the four-star analyst explained. All of these factors played into the rating upgrade.
The rest of the Street takes a more cautious stance on BYND. It has a ‘Hold’ analyst consensus and a $122 average price target. This suggests shares could drop 20% over the next twelve months.
Hold: Hershey Company (HSY)
The last food stock on our list just got a price target boost from J.P. Morgan.
Hershey is one of the most well known candy makers, with it controlling about 45% of the domestic chocolate market. Over the past 85 years, the company has expanded its product portfolio to contain more than 80 brands, including Hershey's, Reese's, Kit Kat, Twizzlers and Ice Breakers.
The company hasn’t stopped there with it announcing its investment in protein bar company FULFIL Holdings Limited and Blue Stripes LLC on August 19.
“As we continue to expand our snacking portfolio, our innovation agenda takes a balanced approach across investing in core brands and experimenting with new business models. This includes creating new platforms through R&D, strategic acquisitions and investments in businesses that are sitting at the cross section of new consumer snacking needs,” Chief Growth Officer Mary Beth West said.
To that end, HSY announced that it would be adding a product ordering tool for retailers to its online portal. Not to mention the company has raised each year’s dividend for nine consecutive years.
Despite all of this good news, Hersey still has challenges it needs to address. Goldman points to the company’s valuation as a cause for concern. HSY has a market cap of $33 billion with a P/E ratio of 27.47. This is compared to its competitor Mondelez’s (MDLZ) $78 billion market cap and 21.26 P/E ratio. As a result, the J.P. Morgan analyst raised his price target from $148 to $151 while reiterating his Hold rating. Goldman thinks shares could drop 4% over the next twelve months.
The rest of the Street mirrors the analyst’s sentiment. With 1 Buy rating vs 8 Holds and 1 Sell received over the last three months, the consensus among analysts is that HSY is a ‘Hold’. Its $141 average price target indicates 11% downside potential.
Sell: McCormick & Company (MKC)
Based on Goldman’s McCormick downgrade, the company won’t be spicing up investors’ portfolios anytime soon.
MKC stock has soared in 2019 with it up 16% year-to-date. However, this has pushed it into what Goldman considers to be overvalued territory. The stock currently trades at $161.01 and has a forward P/E ratio of 28.45 compared to Kraft Heinz’s (KHC) 9.65 forward P/E.
Concerns are also mounting over how heavily Brexit will weigh on McCormick’s business. The company stated that Brexit could cause the number of border inspections to grow and would likely cause costs of goods imported and exported from the UK to increase.
The company has made efforts to expand its reach through a series of acquisitions that included Reckitt Benckiser's (RBGLY) food division for $4.2 billion back in 2017. The deal gave MKC access to the Frank’s and French’s brands. That being said, Goldman doesn't believe that its next acquisition will be able to live up to the size of its previous acquisitions.
“MKC's fundamentals are attractive relative to packaged food peers and the spice category is strong, but the magnitude of margin expansion experienced over the past year is unlikely to recur, and the stock’s much higher-than-average valuation looks stretched to us,” the analyst added. As a result, Goldman downgraded the rating to a Sell and decreased the price target from $154 to $150, implying 7% downside.
The Street isn’t quite as bearish on MKC. It has a ‘Hold’ analyst consensus and a $153 average price target, suggesting 5% downside.