Last week’s high volatility in the markets, the poor July jobs report and the prospect of interest rate cuts by the US Federal Reserve are fuelling renewed fears of an imminent recession. The recent decline in the Purchasing Managers’ Index (PMI) has not helped matters. And as the market recovers this week, investors are starting to diversify their portfolios – and look for a slightly more defensive stance.
The packaged food industry is a good place to look for such portfolio diversification. Grocery is one of those essential products that tends to prove recession-proof – and packaged food stocks have seen gains during the COVID lockdown period. While the packaged food industry is subject to its own cycles and headwinds, its long-term staying power can generally be relied upon.
These facts are the basis for a recent report by Leah Jordan, who covers the American food industry for Goldman Sachs.
“We believe that food-at-home spending should continue to grow at +LSD on a solid cash flow backdrop, with balanced support from volume and price/mix. However, category presence is critical in this normalized environment as both ends of the spectrum – value and premium – continue to gain market share. As such, we favor companies with less exposure to private label risk as well as greater organic growth opportunities through a differentiated portfolio in line with key consumption trends (e.g. convenience, health/wellness, variety of flavors),” Jordan said.
Looking ahead, Jordan makes some specific stock recommendations, specifically naming two stocks in the packaged food space as “top buys” under today’s conditions. We used the TipRanks database to find out what the general sentiment is on these two stocks, so let’s take a closer look.
Conagra Brands (CAG)
The first packaged food stock we’ll look at is Conagra, a Chicago-based holding company with a rich history dating back to 1919. Originally founded as a flour milling company, Conagra has grown into a food industry heavyweight with an extensive portfolio that includes everything from snacks and everyday staples to healthier alternatives. Last year, Conagra generated revenue of about $12.3 billion. The company moved its headquarters to Chicago in 2016, employs over 18,000 people, and operates 42 manufacturing and packaging facilities in the U.S., Canada, and Mexico
In an interesting announcement earlier this month, Conagra announced the acquisition of Sweetwood Smoke & Co., known as the maker of FATTY smoked meat sticks. This is noteworthy because Conagra already owns Slim Jim brand meat sticks – a snack brand known for its low-cost image. The acquisition of FATTY indicates a move to a higher-end snack line. Financial terms of the deal were not disclosed.
Also notable, especially for defensive-minded investors, is that Conagra announced a dividend of 35 cents per common share in July, matching the previous quarter’s dividend and the fifth consecutive quarter at that rate. The dividend is scheduled to be paid on August 29, and the annualized rate of $1.40 produces an inflation-beating yield of 4.7%.
As for financial results, Conagra reported its fourth-quarter 2024 earnings on July 11 – and reported revenue of $2.9 billion. That represented a 2.3% year-over-year decline in net sales and missed guidance by $20 million. On the bottom line, Conagra reported earnings per share of 61 cents on non-GAAP measures. That was 4 cents higher than expected.
So Conagra is a solidly positioned company with a strong place in a defensive equity niche – and Goldman’s Leah Jordan calls the shares a “top idea.” She writes of this food giant: “We believe CAG has a well-positioned frozen and snack portfolio that is in line with current convenience and consumption trends, which should lead to better-than-feared results, along with an attractive valuation, with the company having the highest FCF yield in our coverage.”
Jordan goes into more detail and goes on to explain why Conagra has been off investors’ radar recently. He adds, “Since joining CAG nine years ago, the current management team has repositioned the company by overhauling its processes and culture while revitalizing its brand portfolio. He noted that the biggest change came with the acquisition of Pinnacle Foods in 2018. Because this transition occurred largely in the shadow of Covid, with dynamic fluctuations in home food demand and inflation, we believe this was underestimated by investors.”
These comments reinforce Jordan’s Buy rating on Conagra shares, while her $36 price target means this stock is in line for a 16.5% gain in one year. (To watch Jordan’s track record, click here)
The Goldman assessment is more optimistic than Wall Street’s consensus on the stock. CAG shares have a consensus rating of “Hold” based on 13 recent reviews, including 2 “Buy” and 11 “Hold.” The stock is priced at $30.82 and their average price target of $30.54 suggests they will remain in a range for now. (See Conagra Stock Forecast)
Mondelez International (MDLZ)
Next on Goldman Sachs’ list of food stocks today is Mondelez International, another big player based in Chicago. Mondelez was created as a spin-off of the legendary Kraft Foods, which separated its snack business from the grocery business in 2012. As the heir to the snack division, Mondelez now has a portfolio that includes household names such as Ritz Crackers, Triscuit, Philadelphia Cream Cheese and Chips Ahoy Cookies. With products available worldwide, Mondelez posted total sales of over $36 billion last year.
Mondelez employs approximately 91,000 people and is proud of its diverse workforce that drives innovation in product development. The company operates in over 80 countries and has an extensive network of factories, distribution centers, research and development facilities and administrative offices.
Financially, Mondelez reported net sales of $8.34 billion for the second quarter of 2024, as announced on July 30. This figure was $110 million below estimates and represented a decline of nearly 2% year over year. Despite these misses, the company’s bottom line beat forecasts by 7 cents per share with non-GAAP EPS of $0.86. In addition, Mondelez management expects full-year 2024 organic net sales growth at the high end of the 3% to 5% range and forecasts free cash flow of over $3.5 billion.
It’s worth noting that despite these strong fundamentals, MDLZ shares have underperformed the broader market this year, down a modest 0.5% year-to-date, while the S&P 500 is up 14%.
Mondelez is committed to generating cash returns for its investors, and in the first half of this year the company delivered on that commitment by generating $2.2 billion. The proceeds were generated through both share buybacks and dividend payments. In a positive sign for yield-seeking investors, on July 30 the company announced an upcoming 11% dividend increase to 47 cents per common share. This gives a new annual payout of $1.88 with an expected yield of 2.7%. The new dividend will be paid on October 14 of this year.
For Goldman Sachs, quality is the key point here. Analyst Jordan writes: “We view MDLZ as a high-quality core holding that should generate above-average earnings growth within our coverage, supported by its portfolio of organic opportunities and emerging market exposure.”
Jordan further explains why the stock’s recent losses should not scare investors, adding: “We believe the stock’s recent underperformance is due to continued market share losses and the need for increased pricing action for the U.S. biscuit business, along with uncertainty over increased cost pressures in cocoa. However, we have recently seen a gradual improvement in both metrics, while the company has also taken proactive steps to address the issues.”
For Jordan, MDLZ shares deserve a Buy rating, and their price target, now set at $80, suggests a one-year upside potential of 11.5%.
In total, Mondelez shares have received 20 analyst ratings recently – and the lopsided split of 19 Buy recommendations to 1 Hold gives the stock its Strong Buy consensus rating. The stock is trading for $71.20 and has an average price target of $79.12, implying a gain of 11% by this time next year. (See MDLZ Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important that you conduct your own analysis before investing.
