3 Natural Food Stocks to Savor on Rising Preference for Healthy Food – August 3, 2021

3 Natural Food Stocks to Savor on Rising Preference for Healthy Food – August 3, 2021

Consuming nutritious food for maintaining good health continues to remain a priority for consumers. 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. A few players are also witnessing higher online sales and are investing more on boosting digital capabilities. Continuation of such upsides is likely to benefit industry participants like Wm Morrison Supermarkets PLC (MRWSY Free Report) , Performance Food Group Company (PFGC Free Report) and Sprouts Farmers Market, Inc. (SFM Free Report) .

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 foodservice 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

Pandemic Boosts Inclination Toward Healthy Food Options: Amid the many lifestyle lessons and changes picked up during the COVID-19 pandemic, food preferences and consumption patterns have also undergone alterations. The pandemic has made the 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, due to easing of pandemic restrictions and mass vaccinations, 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.  Some companies in the natural food products arena are likely to witness 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 natural ingredients-based food on 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 toward digital transformation, including online product offerings, delivery systems and marketing.

High Input Costs a Hurdle: Commodity cost inflation is a concern for a number of players in the natural food industry. Prices of commodities like soybean, flour, cooking oil, vegetables, dairy items, egg 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 hurdles across some markets have increased warehouse, packaging and other logistics expenses. Nevertheless, 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 #111, which places it in the top 44% 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 bright 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 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 February 2021, the industry’s earnings estimate for 2021 has improved 5%.

Given the industry’s encouraging 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 but has underperformed the Zacks S&P 500 over the past year.

The industry has gained 19.8% over this period compared with the broader sector’s growth of 2.1%. Meanwhile, the S&P 500 has moved up 35.3% in the said time frame.

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 14.60X compared with the S&P 500’s 21.59X and the sector’s 28.28X.

Over the past five years, the industry has traded as high as 20.31X and as low as 12.5X, with the median being 17.55X as the chart below shows

Price-to-Earnings Ratio (Past 5 Years)

3 Natural Food Stocks to Keep a Close Eye on

Wm Morrison Supermarkets:  This in-store and online grocery retailing company has been gaining from strong contributions across both retail and wholesale categories. A strong brand portfolio has been a key upside for the company. Moreover, it has been striving to boost brands, which offer higher nutritional value. This Zacks Rank #2 (Buy) company has been undertaking efforts to strengthen supply chain, reduce costs as well as enhance e-commerce capabilities. In fact, the company, with the help of prudent partnerships, has been strengthening omni-channel capabilities such as store pickups and same-day deliveries. The company’s shares have gained about 50.1% in a year. The Zacks Consensus Estimate for sales and earnings in fiscal 2021 indicates a rise of 9.6% and 154%, respectively, from the prior-year reported figures.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: MRWSY

Sprouts Farmers: This well-known grocery retailer has been gaining from rising preference for natural and organic food products. Its focus on product innovation, emphasis on e-commerce, expansion of private label offerings and enhancement of technology bodes well. This Zacks Rank #2 company has been strengthening same-day delivery capabilities as well as pickup services across stores. It has also been on track with lowering operational complexity, optimizing production and improving in-stock position. Sprouts Farmers emphasizes on expanding smaller size stores, which are more profitable, and is striving for expansion in areas like produce, frozen as well as protein-rich food offerings. The Zacks Consensus Estimate for earnings for 2021 has remained stable over the past 30 days. The stock has declined 3.2% in a year.

Price and Consensus: SFM

Performance Food Group: The company, which is engaged in the distribution and marketing of food and food-related products, has been gaining from improved sales trends as pandemic restrictions ease, and lead to favorable year-over-year comparisons. It has also been gaining from rising independent case volumes. Performance Food has also been undertaking product innovations and acquisitions to boost market share. The acquisition of Reinhart Foodservice, LLC has been benefiting the company’s Foodservice unit. Moreover, to provide better services, the company is expanding distribution centers. Additionally, the company is committed toward cost management efforts. Notably, the Zacks Consensus Estimate for fiscal 2021 sales and earnings indicates a rise of 18.6% and 85.7%, 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 #3 (Hold) company have surged 47.4% in the past year.

Price and Consensus: PFGC