3 Natural Food Stocks to Watch Amid Strong Industry Trends – November 24, 2022

The demand for nutritious and healthy offerings is increasing as maintaining good health has become a priority for consumers. This trend is working well for the companies in the Zacks Natural Foods industry. Industry participants are strengthening their portfolio strength through innovations and effective acquisitions. A few players are also making increasing investments towards increasing digital capabilities.

Natural food companies are adopting strategic pricing to counter rising cost inflation. Benefits like this would likely work well for companies like Food Performance Group Company (PFGC free report), Sprouts Farmers Market, Inc. (SFM free report) f Spartan Nash Corporation (SPTN Free report).

about the industry

The Zacks Natural Foods industry is comprised of companies that manufacture and sell a wide variety of organic and all-natural fruits and vegetables, dairy products, flour, bakery products, meats, seafood, as well as spices and seasonings. They also offer ready-to-eat and packaged meals, snacks, cereals, and frozen foods. Some of these companies offer comfort food items such as ice cream and soup. A few players offer personal care products in addition to health supplements. Businesses in this field mostly sell their products through wholesalers, distributors, large retail establishments, grocery chains, wholesalers, drug stores, as well as e-commerce service providers. Some also cater to food service channels, including restaurants, coffee shops, and hotels. Others also provide services to schools, hospitals, and industry contractors. Some players operate through independent retail stores.

Key trends shaping the future of the natural food industry

An increasing trend towards healthy food choices: The pandemic has made the society aware of the importance of eating healthy and nutritious food by cooking at home. As a result, the demand for organic and fresh food products has been high, which has led to higher level players in the natural food products industry. Although al fresco dining is back on the scene, many individuals are likely to continue the habit of eating natural and organic foods at home to maintain good health. These trends are likely to continue to support demand for fresh, natural and organic food products. Companies operating in the field of natural food products are also witnessing a revival in their food service business channels with the increasing demand for restaurants and cafes. Industry experts believe that even while eating outdoors, consumers are more likely to choose healthy food choices. This is likely to lead restaurants and cafes to add healthier foods and more natural ingredients to their menu.

Focus on Portfolio Enhancement and Market Access: The companies focused on expanding their portfolio and market presence through strategic partnerships, acquisitions and store expansions. Players in this space have also focused on research and development to offer products that can be easily cooked at home and to develop formulations that are low in preservatives, without compromising on flavours. Food products based on plant-based ingredients, gluten-free, and keto-friendly are gaining prominence. Companies are increasing their production capacity to meet the growing demand for fresh and organic products. Many companies in the natural food industry have benefited from high e-commerce sales due to consumers’ increasing inclination towards online shopping. As a result, companies are investing more in digital transformation, including online product offerings, delivery systems, and marketing.

Escalating Cost Concerns: Commodity cost inflation is a concern for a number of players in the natural foods industry. Prices of commodities such as cooking oil, vegetables, dairy products and animal feed rose. In addition, companies have seen costs associated with operations rise amid the pandemic, such as increased employee salaries to support healthcare needs, as well as costs related to disinfection and safety measures. Supply chain hiccups across some markets have also led to higher costs for warehouses, packaging and other logistical expenses. However, companies are taking initiatives to mitigate cost-related challenges. These include streamlining operational structures, improving manufacturing capacity and supply networks as well as adopting effective pricing policies.

Zacks Industry Ranking indicates great prospects

The Zacks Natural Foods Products segment falls within the broader Zacks Retail – Wholesale segment. The industry is currently ranked Zacks Industry #61, which puts it in the top 24% of more than 250 Zacks industries.

The group’s Zacks Industry Rating, which is essentially the average Zacks rating for all member stocks, points to bright prospects in the near term. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of Zacks-ranked industries is a result of a positive earnings outlook for constituent companies in aggregate. Given revisions to gross earnings estimates, analysts seem to be gradually gaining confidence in this group’s earnings growth potential. Since the beginning of August 2022, the industry’s 2022 earnings estimate has improved by 5.9%.

Given the strong prospects for the industry, we offer some stocks that you may want to consider for your portfolio. But before that, it’s worth taking a look at the industry’s performance and current valuation.

industry vs. wider market

The Zacks Natural Foods industry has outperformed the broader Zacks retail-wholesale segment as well as the Zacks S&P 500 index over the past year.

The industry gained 19.4% during the period in contrast to the broader sector’s decline of 29.4% and the S&P 500’s decline of 16.4%.

Price performance for a year

Industry current assessment

On a 12-month forward price-to-earnings (P/E) basis, which is commonly used to value retail and wholesale stocks, the industry is currently trading at 13.89X compared to the S&P 500’s 17.81X and 21.74X for the sector.

Over the past five years, the industry has been trading as high as 20.31X and as low as 11.82X, with the average being 16.54X as the chart below shows

Price-earnings ratio (last 5 years)

3 natural food balances that must be monitored closely

Bud growers: Zacks earned this #2 (Buy) ranking from its initiatives that focus on product innovation, customer experience, and targeted marketing with great everyday pricing and technology. This popular grocery retailer has been steadily expanding its presence in the all-natural organic space, given the huge demand in this segment. Sprouts Farmers leverages same-day delivery capabilities as well as cross-store delivery services. SFM’s focus on enriching the omnichannel experience certainly shows promise. The Zacks consensus estimate for Sprout Growers’ earnings and sales for the current fiscal year point to growth of 4.6% and 9.5%, respectively, from the figure reported in the year-ago period. The earnings consensus mark is for a jump of 3.1% over the past 30 days. Shares of sprouting growers increased by 22.3% in a year.

you can see The full list of Zacks #1 Stocks (Strong Buy) today is here.

Price and consensus: SFM

Nutritional performance group: The company makes product innovations and acquisitions to increase market share. The acquisition of Core-Mark benefits Performance Food, which is engaged in the distribution and marketing of food and food-related products. Moreover, PFGC’s effective selling prices amid rising cost inflation were an upside. Notably, Zacks Consensus’ estimate of Performance Food’s current fiscal year earnings and sales point to increases of 43.1% and 14.4%, respectively, from the prior year’s reported numbers. The earnings consensus mark is for a jump of 10.7% over the past 30 days. Shares of number two Zacks are up 31.7% in the past year.

Price and consensus: PFGC

Spartan Nash: Shares of Zacks No. 3 (Hold) have increased 29.7% in one year. SpartanNash benefits from focusing on a People First culture, achieving operational excellence as well as meeting customer needs. Efficient pricing also works well for SPTN, a nutritional solutions company. The Zacks consensus estimate for SpartanNash’s top and bottom earnings for the current fiscal year indicates growth of 7.4% and 38.8%, respectively, from the number reported in the year-ago period. The earnings consensus mark is for a gain of about 4% over the past 30 days.

Price and consensus: SPTN

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