The food and beverage companies are facing headwinds from the changing consumer purchase habits, evolving shopping behavior and increasing presence of small firms. As smaller companies are entering the market space, it is becoming tough for the existing players to retain their position.
Further, there has been a shift in consumer preference as they are more inclined toward the non-genetically modified, organic, and gluten free products. Also, there is an industry-wide weakness, as deflationary pressure in commodities such as dairy, beef and eggs are hurting the margins of food companies.
Though food companies are making aggressive efforts and channeling funds toward product and packaging innovation as well as reformulating many existing products with additional nutritional benefits; persistent headwinds like food deflation, stiff competition, and aggressive promotional environment are expected to hurt the food grocers in the near term.
The not-so-impressive scenario in the food industry is evident from the fact that out of the 260-plus industries, the Food-Miscellaneous industry holds a Zacks Industry Rank #182, which forms part of the bottom 29% of the Zacks Classified industries. Even the broader Consumer Staples sector is placed at bottom 13% of the Zacks Classified sectors (14 out of 16).
Having said this, let’s try to ascertain which of these two key food players – ConAgra Foods, Inc. CAG and J & J Snack Foods Corp. JJSF, presently make for a viable investment option in face of the headwinds plaguing the food industry.
Let’s delve into the details.
Our proprietary Zacks Rank, which is designed to predict price movements over the next one to three months, comes in handy in this scenario. Going by this metric, both J & J Snack Foods and ConAgra Foods carry a favorable Zacks Rank #2 (Buy), which shows that both the companies are likely to outperform the broader market over the next one to three months. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The favorable Zacks Rank of J & J Snack Foods is primarily attributable to its focus on acquisitions. The recent acquisition of the business of Hill & Valley Incorporated, a manufacturer of bakery items will help boost earnings in the first year and will help the company to partner with major retailers nationwide. The company is taking measures to lower down manufacturing costs through improved efficiencies and controls. We note that the company has delivered an average positive surprise of 3.60% in the trailing four quarters.
On the other hand, in order to become a high-performing flexible company, ConAgra successfully divested its Lamb Weston business in Nov 2016. However, at present, profit-making prospects of the company, post spin-off, are not clear to the market. Notably, the company’s margins have always remained highly sensitive to the price changes of major raw materials, such as pork, oats, beef and wheat.
In addition, ConAgra has been facing extensive competitive pressure from peers which raise the bargaining power of customers, as well as increase the threats of market-share loss. Further, the strong currency has been hurting the international revenues and profitability of ConAgra, by enhancing the competitive power of the smaller rivals operating in low-cost nations.
Chicago, Illinois-based ConAgra Foods’ market capitalization is $17.54 billion, while that of Pennsauken, NJ-based J & J Snack Foods is just $2.48 billion. Going by its business size, ConAgra is better positioned over the long term owing to its massive scale of operations.
Though both J & J Snack and ConAgra Foods have the unfavorable VGM score of C, J & J Snack seems outpace ConAgra Foods on Growth Style Score. J & J Snack’s growth score is A, while ConAgra’s growth score id ‘C’.
Our Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with Growth Style Scores of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best investment opportunities in the growth investing space.
Since J & J Snack carries a Zacks Rank #2, along with a Growth score of A, we should consider it a favorable investing option.
Considering price-to-earnings (P/E) ratio, J & J Snack Foods looks overvalued when compared to the industry as well as the S&P 500 over the past one year. The stock has a trailing P/E ratio of 32.39, which is above the median level of 30.01. Also, the trailing 12-month P/E ratio is higher than the industry and the S&P 500 levels of 22.54 and 24.36, respectively.
On the other hand, ConAgra Foods is undervalued when compared to the industry as well as the S&P 500 as the stock has a trailing P/E ratio of 17.53. It is also lower than the median level of 19.43.
ConAgra Foods looks attractive considering that its market price is presumed to be below the true intrinsic value.
The performance of the companies is well-reflected in the prices over the past one year. While shares of ConAgra Foods have underperformed the Zacks categorized Food-Miscellaneous/Diversified industry, those of J & J Snack Foods have significantly outpaced the broader industry. Shares of J & J Snack improved 25.01%, while ConAgra Foods has slipped 7.12% since the past one year. The industry has advanced 4.36% since last year.
Upward estimate revisions are indicative of positive investor sentiment about a stock. The Zacks Consensus Estimate for J & J Snack Foods has increased 2.8% and 2.2% for fiscal year 2017 and 2018, respectively over the last 60 days. However, the same has remained almost unchanged for both fiscal 2017 and 2018 over the last 60 days at ConAgra Foods, rendering a doubt on the stock.
J & J Snack’s earnings in fiscal 2017 are expected to grow by 8.02%. However, the scenario is not favorable for ConAgra due to soft sales. Earnings per share are projected to contract 17.5% for fiscal 2017.
The above arguments clearly state that J & J Snack is better placed currently and should offer great value to investors.
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ConAgra Foods Inc. (CAG): Free Stock Analysis Report
J & J Snack Foods Corp. (JJSF): Free Stock Analysis Report
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