These Packaged Food Stocks Look Tasty

The growing remote work trend, healthy eating and resumption of busy schedules are helping to drum up demand for packaged foods. And while the pandemic pushed the valuations of companies in this sector higher, there remain pockets of value.

Some of these companies are particularly benefitting from the growing consumer preference for ‘clean eating’. It’s a trend that’s fuelled by the dramatic rise of the global organic food market, which is projected to soar from US$168 billion in 2020 to US$369 billion by 2026, growing at a 14.59% annual clip.

The following companies are cooking up culinary creations ‘to go’ and have finely tuned to established consumer trends and emerging pandemic-led preferences. They’re also trading at a sizeable discount to their fair values, reflecting both upside potential and a margin of safety.

Packaged food behemoth, Conagra Brands (CAG) operates predominantly in the U.S. (over 90% of revenue and profits). It has a significant presence in the freezer aisle, with brands such as Marie Callender’s, Healthy Choice, Banquet, and Birds Eye. The majority of revenue is derived from the U.S. retail channel, while 7% of sales come from the food-service channel.

Conagra has been aggressively reshaping its portfolio, which has materially improved the company’s growth and margin profile. As part of that strategy Conagra has shed non-branded businesses and acquired several branded companies that boast attractive growth and margins, says a Morningstar equity report.

Most notable of its purchases includes the US$11 billion acquisition of Pinnacle Foods. The deal brought “many leading brands, such as Birds Eye, the top-selling brand of frozen vegetables, Duncan Hines, the second most popular cake mix brand, Gardein, the third most popular brand of plant-based meat, and several smaller on-trend brands,” the report says.

As a result of these actions, Conagra now has a strong portfolio of brands and an improved growth profile. “We estimate Conagra’s current weighted average category growth rate is now about 2.4%, a significant improvement from the 1% rate we estimate the firm experienced before the reshaping,” says Morningstar equity analyst Rebecca Scheuneman, who recently raised the stock’s fair value from US$41.50 to US$42, promoted by stronger than expected sales.

While the company lacks a sustainable competitive advantage or wide moat, it “maintains many market-leading brands, which makes it an important partner to retailers,” argues Scheuneman.

Pioneer of plant-based meats, Beyond Meat (BYND) makes vegan burgers, sausage, ground beef, and chicken. Unlike other vegetarian products, Beyond Meat’s products replicate the look, cook, and taste of meat, catering to omnivores and vegetarians alike.

The products are widely available across the U.S. and Canada and in 83 additional countries (international revenue represented 20% of 2020 sales). The company is recovering from the impact of the pandemic with new deals with McDonald's and Yum Brands boosting its food-service sales.

Beyond Meat is well-positioned to benefit from the glowing prospects for the meat-like PBM market. The global PBM market is forecasted to grow from US$21 billion in 2020 (per Euromonitor) to US$79 billion by 2030, or 14% annually. “We expect a primary growth driver to be the 20% of consumers willing to adjust their habits to benefit the environment, as Beyond’s products emit 90% less greenhouse gases and require 93% less land, 99% less water, and 46% less energy to produce than their meat equivalents,” says a Morningstar equity report.

PBMs are particularly suited for China and India, the world’s two most populated countries, each with 1.4 billion people. “The products offer a great solution for China, which does not have enough arable land to feed its huge population, and a great fit for India’s large vegetarian population,” argues Scheuneman, who puts the stock’s fair value at US$119.

Beyond’s market share is expected to increase from 2.0% in 2020 to 8.3% in 2030 “as PBMs gain a larger share of the overall meat category and Beyond’s brand continues to win with consumers,” asserts Scheuneman.

King of cookies and crackers and other packaged foods, Kellogg (K) is a household name in 180 countries. Its portfolio includes well-known brands such as Special K, Frosted Flakes, Froot Loops, Pringles, Rice Krispies, Pop-Tarts, Eggo, Kashi, and Morningstar Farms. International sales account for around 40% of Kellogg's consolidated sales.

The company’s strategic and increased investments in capabilities and brands is bearing fruit. “For one, Kellogg has wisely divested of several noncore brands to focus its resources on the highest-return opportunities, including its expanded reach in the on-trend snacking aisle (which now accounts for about half of its sales),” says a Morningstar equity report.

To help its brand stay top of mind, the firm could spend more than 7% of sales, or around US$1.1 billion annually in aggregate, on research, development, and marketing over the next 10 years to counter intense competitive and macroeconomic pressures, the report notes.

Kellogg’s prospects are particularly healthy in faster-growing emerging markets that have boasted outsize growth of late. Organic sales are up low double digits on a two-year stack basis in Asia, the Middle East, and Africa, a high-teens percentage of its consolidated sales in the third quarter.

“Despite near-term uncertainty, the firm’s robust exposure to these regions (far outpacing its domestic peers) will prove advantageous over a longer horizon,” says Morningstar sector director, Erin Lash, who recently edged up the stock’s fair value from US$83 to US$85.

Further, organic and inorganic pursuits to adapt its products to local trends and the affordability of its fare should aid its growth prospects, Lash notes.