With maintaining good health remaining a priority for consumers, the demand for nutritious and healthy offerings has been rising. Such a trend is favoring players in the Zacks Natural Foods Products industry. Companies in this space are boosting their portfolio strength through prudent innovations and acquisitions. A few players are also making increased investments toward augmenting digital capacities.
The companies are also adopting strategic pricing to counter rising cost inflation. Upsides like these are likely to work well for industry participants like Performance Food Group Company PFGC, Sprouts Farmers Market, Inc. SFM and Farmer Bros. Co. FARM.
About the Industry
The Zacks Natural Foods Products industry comprises companies that manufacture and sell a wide range of organic and natural fruits, vegetables, dairy products, flour, bakery items, meat and seafood as well as spices and condiments. They also offer packaged ready-to-eat meals, snacks, cereals and frozen food. Some of these companies offer comfort food items like ice cream and soups. A few players provide personal care products as well as health supplements. The firms operating in this space sell their products mostly through wholesalers, distributors, large retail organizations, grocery chains, mass merchandisers, drug stores as well as e-commerce service providers. Some also cater to food service channels, including restaurants, cafes and hotels. Others also offer services to schools, hospitals and industry caterers. Some of the players operate through independent retail stores.
Major Trends Shaping the Future of the Natural Food Industry
Rising Inclination Toward Healthy Food Options: The pandemic has made society aware of the importance of consuming healthy and nutritious food by cooking at home. As a result, the demand for organic and fresh food products has been high, acting as an upside for players in the natural food products industry. Although outdoor dining is gradually back on the scene, many individuals are likely to continue the habit of consuming natural and organic food at home for maintaining good health. Such trends are likely to keep supporting the demand for fresh, natural and organic food products. Companies in the natural food products arena are also witnessing a revival in their foodservice business channels as demand for restaurants and cafes gathers pace. Industry experts believe that even while dining outdoors, consumers are likely to opt for healthier food options. This is likely to lead restaurants and cafes to add healthier and more natural ingredients-based food to their menu.
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 at home and develop formulations that are low on preservatives, without compromising on flavors. Plant-based, gluten-free and keto-friendly ingredients-based food products are gaining prominence. Companies have been ramping up production capacity to meet the rising demand for fresh and organic products. Several companies in the natural food industry have been benefiting from higher e-commerce sales owing to consumers’ growing inclination toward online shopping. As a result, companies are investing more in digital transformation, including online product offerings, delivery systems and marketing.
Escalated Cost Concerns: Commodity cost inflation is a concern for a number of players in the natural food industry. Prices of commodities like cooking oil, vegetables, dairy items and animal feed have been rising. Additionally, companies have been witnessing high costs associated with operating amid the pandemic, like increased pay to employees to support healthcare needs, as well as costs related to sanitization and safety measures. Supply-chain hiccups across some markets have also led to higher warehouse, packaging and other logistics expenses. That said, companies have been adopting initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing manufacturing capacity and supply networks as well as adopting effective pricing policies.
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 #97, which places it in the top 38% 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 solid 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since the beginning of June 2022, the industry’s earnings estimate for 2022 has improved 1.1%.
Given the industry’s bright prospects, we present a few 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. Broader Market
The Zacks Natural Foods Products industry has outperformed the broader Zacks Retail – Wholesale sector as well as the Zacks S&P 500 over the past year.
The industry has gained 8.1% over this period in contrast to the broader sector’s decline of 15.8% and the S&P 500’s decline of 4%.
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 13.84X compared with the S&P 500’s 18.53X and the sector’s 23.95X.
Over the past five years, the industry has traded as high as 20.31X and as low as 12.5X, with the median being 16.8X 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: The company has been benefiting from rising independent case volumes. Performance Food has also been undertaking product innovations and acquisitions to boost market share. The acquisition of Core-Mark is benefiting the company, which is engaged in the distribution and marketing of food and food-related products. Moreover, PFGC’s efficient selling prices amid rising cost inflation have been an upside. Notably, the Zacks Consensus Estimate for Performance Food’s current fiscal year earnings and sales indicates a rise of 25.8% and 12.2%, respectively, from the prior-year reported figures. The consensus mark for earnings has remained stable over the past 30 days. Shares of this Zacks Rank #2 (Buy) company have surged 21.2% in the past year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: PFGC
Sprouts Farmers: This Zacks Rank #3 (Hold) company has been gaining from its initiatives focused on product innovation, customer experience and targeted marketing with everyday great pricing and technology. This well-known grocery retailer is steadily expanding its presence in the natural organic space, given the huge demand in the segment. Sprouts Farmers has been strengthening same-day delivery capabilities as well as pickup services across stores. Certainly, SFM’s focus on enriching the omni-channel experience bodes well. The Zacks Consensus Estimate for Sprouts Farmers’ earnings and sales for the current fiscal year suggests growth of 5.2% and 4.3%, respectively, from the figure reported in the year-ago period. The consensus mark for earnings implies a 2.3% jump over the past 30 days. Shares of this well-known grocery retailer have rallied 25% in a year.
Price and Consensus: SFM
Farmer Bros.: This national coffee roaster and wholesaler and distributor of tea, coffee and culinary products has been gaining from its strong product portfolio. The company is benefiting from continued recovery from the pandemic. Farmer Bros. has been seeing strength in both – direct-store-delivery (“DSD”) and Direct ship channels. Efficient pricing and business optimization efforts are also working well for FARM. The Zacks Consensus Estimate for Farmer Bros.’ top and bottom lines for the current fiscal year suggests growth of 14.9% and 61.5%, respectively from the figure reported in the year-ago period. The consensus mark for the bottom line has remained unchanged over the past 30 days. Shares of this Zacks Rank #3 company have declined 32.1% over the past year.
Price and Consensus: FARM
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