Investors are tucking into food stocks – and why not? They can offer downside risk protection in a rocky climate and provide a balanced diet when sectors like technology and real estate upset even the strongest of stomachs.
As Morningstar’s senior equity analyst Ioannis Pontikis put it: ‘Food stocks generate more resilient, consistent and predictable sales and cashflows throughout a full business cycle versus stocks that rely on discretionary income.’
There’s definitely more interest in the food sector, but not all food companies are being treated equally at the moment. We’re seeing a big polarisation between winners and losers.
Ben Black
Director, Verlinvest
Examples are aplenty. In one of the choppiest years for equities recently, Idaho-based frozen potato company Lamb Weston (LW) managed to increase its annual revenue for 2022 by 11.6%. Kisses chocolate maker Hershey (HSY) recorded a rise of 16.1% in the same period, while the full-year revenue of agricultural commodities giant Archer Daniels Midland (ADM) was up 19.5%.
Food companies have profited from three factors
Covid – lockdowns led to an uptick in food consumption at home. But, as Pontikis pointed out, that trend has reversed as the foodservice channel rebounded in recent quarters.
Ubiquitous online shopping – a boon for food companies with well-established digital capabilities and direct-to-consumer channels.
The never-ending grind of self-improvement – also known as making more wholesome lifestyle choices.
‘Healthy eating and sustainability concerns have benefitted food companies with strong R&D capabilities,’ Pontikis explained. ‘They can develop and offer new innovations such as plant-based food, scientifically backed food supplements and food products with functional ingredients.’
Food companies that are able to innovate quickly are exactly the type of business Ben Black is looking for.
‘There’s definitely more interest in the food sector, but not all food companies are being treated equally at the moment. We’re seeing a big polarisation between winners and losers,’ said the director of international family-backed investment company Verlinvest.
Verlinvest, which funded brands like Oatly and Tony’s Chocolonely, focuses on growth rather than mature companies. That’s not to say the latter aren’t on Black’s radar but ‘companies that we see winning are bringing something new to the consumer. They’re creating a new category and taking the lead in that’.
One company that’s ticking all these boxes is Vita Coco (COCO). ‘By introducing [European] consumers to coconut water, the brand was category-defining by nature.’
Food for thought
From a sector perspective, large, innovative food names are well-placed to take advantage of rapidly changing consumer tastes and preferences.
‘Along with stricter regulations around food and nutrition, they open up opportunities for premiumisation and more innovations, from functional ingredients to healthier snacking and convenient food,’ Pontikis said.
In his opinion, the long-term appeal of food stocks isn’t about the sector per se but about companies that have built sustainable competitive advantages over the years: ‘I’d say these tend to be concentrated around the distribution strength of the food company and secondarily branding and marketing – but these two go hand-in-hand most of the time.’
Given slim margins, grocers tend to rely more on fast-churning categories to support their return on invested capital.
‘This gives them an extra incentive to offer prime shelf space in stores to food manufacturers with strong brands that consumers are familiar with,’ Pontikis added.
‘Hence, tier-1, competitively advantaged food businesses like wide-moat Nestlé or narrow-moat JDE Peet’s are better positioned to be successful in the long term.’
