The recently released reports of robust macroeconomic data are increasing the odds of another interest rate hike by the Fed this month. This is boosting fears of a recession later this year. During economic uncertainty, food makers present an excellent investment opportunity as they can maintain their profit margins due to the nature of their business.
To that end, it could be wise to buy fundamentally strong food stocks Sysco Corporation (SYY), Kellogg Company (K), and US Foods Holding Corp. (USFD).
Before delving deeper into the fundamentals of these stocks, let’s discuss how the food industry can perform well during economic uncertainties and why it is well-positioned for growth.
Food makers constantly innovate and invest in research and development (R&D) as consumer preferences and dietary needs evolve. Automation technologies such as robotics, the Internet of Things (IoT), and artificial intelligence (AI) are being embraced by food makers to enhance the quality of their operations.
Furthermore, food makers remain insulated from the challenges of different economic cycles. Due to the inelastic demand for food, food makers can maintain their profit margins. Moreover, any increase in input costs can be quickly passed on to the consumers by food makers enabling them to grow their margins.
The global packaged food market size is expected to grow at a CAGR of 8.6% to reach $3.70 trillion by 2028. This growth could be attributed to consumers' busy lifestyles and increasing demand for convenience.
Additionally, advancements in plant-based products, bold flavors, and nutritious ingredients are driving the food industry forward. According to Statista, the food market’s revenue is estimated to amount to $9.24 trillion. The food market is projected to grow at a compounded annual growth rate (CAGR) of 7.3% between 2023 and 2028.
Let's examine the fundamentals of the featured stocks.
Sysco Corporation (SYY)
SYY markets and distributes food and related products to the foodservice industry in various countries. It operates through different segments: U.S. Foodservice Operations, International Foodservice Operations, SYGMA, and others. SYY distributes various food and non-food products to various foodservice venues.
On April 24, 2023, SYY announced its Riverside Electric Vehicle Hub vision. This innovative project aims to convert the company's distribution center into a central location for its electrified fleet.
The Riverside Electric Vehicle Hub is one of the pioneering initiatives globally, as SYY strives to decrease its direct emissions by 27.5% and incorporate 2,800 electric trucks into its fleet by 2030, helping it achieve its sustainability targets.
Its 106.77% trailing-12-month return on common equity is 949.7% higher than the 10.17% industry average. Its 14.13% trailing-12-month return on total capital is 124.6% higher than the 6.29% industry average. Likewise, its 3.36x trailing-12-month asset turnover ratio is 271.7% higher than the industry average of 0.90x.
For the fiscal third quarter ended April 1, 2023, SYY’s non-GAAP operating income increased 27.8% year-over-year to $735.50 million. The company’s non-GAAP net earnings increased 26.9% year-over-year to $460.50 million. Its adjusted EBITDA increased 19% year-over-year to $899.70 million. Also, its non-GAAP EPS came in at $0.90, representing an increase of 26.8% year-over-year.
Street expects SYY’s EPS and revenue for the quarter ending June 30, 2023, to increase 15.7% and 5.4% year-over-year to $1.33 and $19.98 billion, respectively. Over the past month, the stock has declined 5.3% to close the last trading session at $72.08.
SYY’s POWR Ratings reflect strong prospects. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #3 out of 80 stocks in the B-rated Food Makers. It has a B grade for Growth, Value, Momentum, Stability, and Quality. Click here to see SYY’s rating for Sentiment.
Kellogg Company (K)
K manufactures and sells snacks and convenience foods worldwide. It operates in four segments: North America, Europe, Latin America, and Asia Middle East Africa. The company's products include various snacks, cereals, waffles, veggie foods, and noodles.
In terms of the trailing-12-month EBIT margin, K’s 9.44% is 40.5% higher than the 6.67% industry average. Its 5.02% trailing-12-month levered FCF margin is 86.8% higher than the 2.69% industry average. Likewise, its 21.31% trailing-12-month Return on Common Equity is 109.5% higher than the industry average of 10.17%.
K’s net sales for the first quarter ended April 1, 2023, increased 10.4% year-over-year to $4.05 billion. The company’s adjusted gross margin was 31.3%, compared to 30.4% in the year-ago period. Its adjusted operating profit increased 15.3% year-over-year to $549 million.
In addition, its adjusted EPS remained flat year-over-year at $1.10. Also, its adjusted gross profit rose 13.7% year-over-year to $1.27 billion.
Analysts expect K’s EPS for fiscal 2024 to increase 4.9% year-over-year to $4.30. Its revenue for the quarter ending June 30, 2023, is expected to increase 4.9% year-over-year to $4.05 billion.
It surpassed the EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 2.9% to close the last trading session at $66.57.
K’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.
It has a B grade for Stability and Quality. It is ranked #10 out of 80 stocks in the same industry. To see K’s ratings for Growth, Value, Momentum, and Sentiment, click here.
US Foods Holding Corp. (USFD)
USFD is a distributor of fresh, frozen, and dry food products, as well as non-food products, to foodservice customers across the United States. Its customer base includes independently owned restaurants, regional and national chains, hospitals, hotels, universities, and retail locations.
On May 19, 2023, USFD announced that it had agreed to acquire Renzi Foodservice, a broadline distributor based in Watertown, New York. This acquisition will enable USFD to extend its presence into central upstate New York, an area where the company currently lacks a distribution centre.
USFD’s CEO, Dave Flitman, said, “We look forward to welcoming the Renzi team to US Foods as we continue to deliver on our long-range plan and enhance our position with new and existing customers throughout the region.”
Its 2.68x trailing-12-month asset turnover ratio is 196.5% higher than the 0.90x industry average.
USFD’s net sales for the first quarter ended April 1, 2023, increased 9.5% significantly to $8.54 billion. Its adjusted gross profit rose 14% year-over-year to $1.45 billion. The company’s adjusted net income rose 56.3% year-over-year to $125 million.
Its adjusted EBITDA increased 39.8% year-over-year to $337 million. Also, its adjusted EPS came in at $0.50, representing an increase of 38.9% year-over-year.
For the quarter ending June 30, 2023, it is expected to increase 11.7% and 5.5% year-over-year to $0.75 and $9.31 billion, respectively. Over the past year, the stock has gained 31% to close the last trading session at $41.92.
USFD’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value, Momentum, and Sentiment. It is ranked #2 in the Food Makers industry. To see the other ratings of USFD for Stability and Quality, click here.
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SYY shares were trading at $72.25 per share on Friday afternoon, up $0.17 (+0.24%). Year-to-date, SYY has declined -4.28%, versus a 12.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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