Investors can expect to see more deal activity in the U.S. food sector in 2024, as companies are still seeking to improve the growth profile of their portfolios in a low-volume environment.
That’s the view of Stifel analysts in a note published Thursday, in which they reiterated a neutral rating on the group, given a valuation that’s a roughly 20% discount to the S&P 500.
“While valuation remains compelling in relation to history for the food stocks, we remain cautious, reflecting the uncertainty in revenue-growth pacing in 2024 as volumes remain soft, the risk of accelerated private-label market-share gains, and potential for increased promotional activity,” analysts led by Matthew E. Smith wrote in a note to clients. “We advise investors to remain selective in their food exposure.”
Deals, which could include spinoffs, acquisitions and divestitures, are likely now that balance sheets are in an improved state and cash flow is expected to grow again, the note said. While the analysts have no specific knowledge of planned deals, companies ready to acquire based on their balance sheets include General Mills Inc., Kellanova Inc.
K,
Kraft Heinz Inc., Mondelez, Hershey Inc.
HSY,
and Nestlé
NESN,
they wrote.
Debt levels have come down and cash flow is robust, with large-cap food companies expected to generate $8 billion in free cash flow after dividends this year.
At the same time, companies are grappling with an uncertain recovery trajectory for volumes, which have been hurt in the inflationary environment. Stifel is expecting a modest 2% organic sales growth for the group in 2024 and 4% growth in per-share earnings.
“We expect volume growth to improve through 2024, with volume growth taking hold in the second half,” said the note.
Cost-inflation trends are improving and expected to be slightly lower based on current input prices, including a carry-over benefit from lower prices at the end of the year.
“Input costs have started to roll over and our commodity index indicates a 1.5% decline in costs for 2024 if current prices hold following a high-single-digit decline in 2023,” the note said.
The analysts are expecting only targeted price increases, given the current input-cost environment and with productivity programs supporting an improving gross-margin performance in 2024. Stifel is expecting 40 basis points of expansion for the year.
Still, private label is gaining market share, albeit at a subdued pace in 2023. That may accelerate this year if economic conditions weaken and encourage consumers to eat more at home and less in restaurants.
From the archives (November 2023): Kraft Heinz and J.M. Smucker upgraded as analysts say Ozempic fears are overdone
Stifel is recommending a range of stocks that it rates a buy. The list includes BellRing Brands
BRBR,
General Mills
GIS,
Kraft Heinz
KHC,
Lamb Weston
LW,
Mondelez
MDLZ,
Post Holdings
POST,
Simply Good Foods
SMPL,
Vital Farms
VITL,
and Westrock Coffee
WEST,
It has hold ratings on companies, including Conagra Brands Inc.
CAG,
Campbell Soup Co.
CPB,
Hain Celestial Group Inc.
HAIN,
Hershey Co., WK Kellogg Co.
KLG,
McCormick & Co.
MKC,
J.M. Smucker Co.
SJM,
Sovos Brands Inc.
SOVO,
and TreeHouse Foods Inc.
THS,
More from the archives (November 2023): Kroger offers cautious guidance amid food-at-home disinflation
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