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Why Food Stocks May Continue to Disappoint in 2018

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Sales and margin headwinds: Key deterrents

Stocks of the packaged food manufacturers are likely to underperform the broader markets, as weak sales and pressure on margins are expected to pressure them. Packaged food manufacturers are witnessing low demand for their traditional products amid a consumer shift toward fresh, healthy foods.

Retailers’ tight inventory management and prolonged price competition are further pressuring their margins. Notably, inflation in input product prices, brand investments, promotions, and higher-than-expected increases in transportation costs are also hurting their margins.

Amid these challenges, Kellogg (K), General Mills (GIS), Hershey (HSY), Campbell Soup (CPB), and Conagra Brands (CAG) are focusing on optimizing their product portfolios through acquisitions and innovation-led products.

The acquisition of fast-growing snack brands has helped these companies generate incremental sales growth. However, analysts expect the overall soft demand for packaged foods to restrict their upside.

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YTD stock performance

The chart above shows that the stocks of packaged food manufacturers are trading in the red on a YTD (year-to-date) basis as of March 21, 2018. Investors remain wary of the fact that higher-than-expected inflation in commodity prices and increased logistics costs are expected to hurt the margins of these companies.

Credit Suisse stated that it expects packaged food manufacturers to generate growth in the low single digits in 2018. Credit Suisse added that it expects these companies to underperform the broader market modestly.

The stock prices of Kraft Heinz (KHC), General Mills, Hershey, and Campbell Soup have fallen 20.3%, 23.2%, 13.2%, 12.3%, respectively, on a YTD basis.

The stock prices of Conagra Brands, Kellogg, Mondelēz (MDLZ), and J.M. Smucker (SJM) have fallen 6.2%, 6.3%, 1.8%, and 3.3%, respectively, on a YTD basis. However, the S&P 500 Index has increased 1.4% year-to-date.

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