Equities outlook for packaged foods companies looks iffy: Wall Street analysts

by Josh Sosland
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 Wall Street
The equities outlook is iffy for 2017 and even iffier for packaged foods companies.
 

KANSAS CITY — Notwithstanding, or perhaps because of, the post-election stock market surge, the equities outlook is iffy for 2017 and even iffier for packaged foods companies. That was the conclusion of investment analysts interviewed recently by Milling & Baking News, a sister publication to MEAT+POULTRY.

Brett M. Hundley, an equity research analyst with Vertical Group, Richmond, Virginia, expressed concern the market’s idealized vision of an impending Trump administration may not match up with the ultimate reality.

Brett
Brett M. Hundley, an equity research analyst with Vertical Group

“I’m torn,” he said “I think an incoming Trump administration throws a lot of uncertainty into the equation. On the surface, the ideas he has put forth should spell out continued gains for the stock market, but I think a lot of people are questioning whether he will follow through on the ideas.”

Mitchell B. Pinheiro, a senior vice-president and senior research analyst with Memphis, Tennessee-based Wunderlich, said the stock market has gotten ahead of itself in the face of a potentially promising economic outlook.

“I am cautious on the market only due to the fact this large run post the election has borrowed some of the performance for next year and moved it into 2016,” he said. “I think it could be rough sledding not because the economy isn’t okay but because of valuations already anticipating the potential positive fundamentals.”

Those positives don’t necessarily extend to the environment for the food sector, Hundley said.

“On a more micro level, when you begin getting into sectors like packaged foods and consumer staples, I think it will be a difficult overall environment,” he said. “Growth remains hard to come by. A lot of companies have been manufacturing earnings growth through internal cost cutting, share repurchase and debt retirement. It remains a tough overall market for growth.”

Hundley’s concern about the food sector outlook was colored by what has been a more difficult year than expected in 2016.

“I would say the revenue dynamics are probably weaker than we had anticipated,” he said. “We have been in a deflationary commodity environment for a while. We were not expecting much from pricing to drive top-line growth, but the volume side has been somewhat surprising, somewhat more negative than anticipated. I had thought with the falling unemployment, the consumer would get back on his feet and drive greater growth.

“Food and agribusiness companies have done a good job of removing costs from their businesses. From an earnings standpoint, the industry has performed as expected, with more cost cutting and less sales growth than expected.”

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John J. Baumgartner, a vice-president and senior analyst with Wells Fargo, New York, also highlighted the persistent lack of sales volume growth as a red flag for the food sector.

“For the food sector specifically, fundamentals are pretty poor,” he said. “Volume has been down for five straight years. Companies are not getting a pricing contribution of growth, and that’s been driving them to cut costs to grow profit given they can’t count on sales growth. I think that’s going to be the issue across the board.”

Volumes since December 2015 have drifted downward, and Mr. Baumgartner said “it’s tough to see” where growth may come from moving forward.

“A lot of people in the industry have wrestled with why volume is down,” he said. “What we’ve found is that since the credit crisis about a third of consumers say they use weekly grocery savings to pay other household bills. It blows me away that this far into a recovery you have people using food savings for household working capital.”

While acknowledging some move of shoppers toward the perimeter of the store, Baumgartner said the focus on this as a principal factor weighing on center-of-store sales is overblown.

“There has been some migration to packaged fresh categories, but my issue is, eating that way, trying to shop the perimeter is not cheap,” he said. “The number of households that do that is fairly limited. Most of the volume decline is from wasting less.”

Still, Pinheiro said food companies might benefit from a proposed cut in the corporate tax rate to 15 percent.

“Corporate tax rates are fairly high, so this group will definitely benefit if corporate tax rates fall,” he said. “Most companies are not highly leveraged, so the lack of an interest exemption will not be as painful. Capital spending isn’t that high, so the tax changes could be positive for the sector.”

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