Will Tough Times Endure for Food Manufacturers in 2Q17?

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Will Tough Times Endure for Food Manufacturers in 2Q17? PART 1 OF 6

What’s Really Driving Packaged Food Manufacturer Stocks?

Industry trend

Food manufacturers in the US (SPY) are going through a rough phase. Weak volume trends stemming from a consumer shift toward fresh and wholesome foods and delayed tax refunds hurt most major players in 1Q17, while increased competition and adverse currency movements continue to pressure top- and bottom-line results.

What’s Really Driving Packaged Food Manufacturer Stocks?

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Given the current soft sales environment, almost all major food manufacturers are banking on portfolio restructuring, cost-cutting initiatives, and innovative product offerings to drive balanced growth. Although most have managed to drive bottom-line growth through productivity and cost-savings initiatives, top lines remained sluggish in the last reported quarter.

What’s behind the stock uptrend?

As the graph above shows, the share prices of food manufacturers are showing an uptrend, as consumer spending is likely to pick up in the later part of the year. Meanwhile, innovative product pipelines for 2H17 are expected to accelerate sales growth.

Despite the industry-wide slowdown, confectionery stocks seem to be in a bright spot, with the snacks and confection markets still witnessing steady growth, as reflected in the rise in the household and channel penetration rate.

Hershey, Mondelēz, Kraft Heinz, and Kellogg

Notably, Hershey (HSY) managed to grow its sales and profitability in 1Q17 and is projected to generate healthy growth in 2017. Hershey stock has risen ~6.5% since its 1Q17 earnings. Mondelēz (MDLZ), whose stock has risen ~6.9% after its 1Q17 earnings, is forecasting double-digit bottom line growth in 2017, driven by innovative well-being products and productivity savings.

Kellogg (K) and Kraft Heinz (KHC), which until now have disappointed in sales, are witnessing steady rises in their stock prices as their managements expect top-line improvement in coming quarters, driven by a recovery in consumption trends. Kellogg and Kraft Heinz stocks have risen 6.1% and 5.4%, respectively, since their 1Q17 earnings.

On a YTD basis, Hershey, Mondelēz, Kraft Heinz, and Kellogg have generated returns of 11.7%, 5.5%, 7.4%, and -0.8%, respectively, as of June 7, 2017. By comparison, the Consumer Staples Select Sector SPDR ETF (XLP) has generated a return of 10.6%.

Series overview

In this series, we’ll compare the above four major food manufacturers based on fundamentals. We’ll focus on sales and profitability and discuss valuations as well as analysts ratings.

Continue to the next part to see how these four companies have performed in terms of earnings per share.


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