- Morgan Stanley analyst Pamela Kaufman has put forth the 2023 outlook for the performance of U.S. food companies.
- As consumers face increasing macro pressures, including ongoing inflation, rising interest rates, and rising unemployment, the analyst expects the packaged food group to continue to offer investors a safe haven, particularly in 1H23.
- The analyst sees the sector delivering another year of above-average topline growth in 2023, benefiting from consumers shifting their consumption to Food at Home (FAH) as they look for savings.
- The carryover benefit of pricing taken in the back half of 2022, and recovering inventory levels/distribution at retail as supply chain conditions improve should help the sector, said the analyst.
- The analyst noted that a key risk for the group is increasing demand elasticity from consumers trading down to private label, a dynamic that did not meaningfully play out during 2022 despite pronounced food inflation.
- The analyst sees scope for modest margin expansion in 2023 due to moderating commodity prices.
- Pamela Kaufman prefers companies that should see sustained strong topline momentum due to their leading share in snacking and BFY (better-for-you) categories with attractive long-term growth rates.
- The analyst recommends Mondelez International Inc (NASDAQ:MDLZ) with an Over Weight rating and $75 price target, which has advantaged category/geographic exposure to snacking.
- Also Read: Mondelez Divests Gum Business In US, Canada & Europe To Alpenliebe-Owner Perfetti Van Melle For $1.35B
- The analyst also sees attractive opportunities in BellRing Brands Inc (NYSE:BRBR) with an Over Weight rating and a $28 price target, which should see strong topline growth supported by growth in RTD protein shake category.
- Kaufman also upgraded Conagra Brands Inc (NYSE:CAG) to Over Weight with a $45 price target as the company should benefit from FAH consumption with its frozen dinners and solid growth in its snacks portfolio.
- Related: Conagra Brands Is ‘Improving’: Why This Analyst Turned Bullish Despite Tailwinds
- The analyst also downgraded Hostess Brands Inc (NASDAQ:TWNK) to Equal Weight, removing it as the top pick after a 41% share price appreciation in the last 18 months, outperforming the S&P 500 by 50% over that period.
- In 2023, the analyst sees increasing risk of trade- down pressuring branded food volumes and pricing as consumers face greater macro pressures, branded-to-private label price gaps are widening and private label product availability improves with the supply chain.
- Private label is gaining the most share in the soup, coffee, refrigerated dough, and cookies categories, the analyst added.
- The analyst sees food price disinflation in 2023, but still expect pricing +4.6% in 2023, above pre-pandemic levels of 1.3% on average in 2010-19.
- The analyst sees valuation as stretched for select companies, including General Mills Inc (NYSE:GIS) and Hershey Co (NYSE:HSY), where there is limited scope for multiple expansions.
- Also See: Hershey Earnings Beat Could Make For A Sweet Holiday Season, Analyst Says
- The analyst sees valuations as attractive at MDLZ, CAG, and BRBR, which are trading below peers.
- Price Action: CAG shares are up 0.68% at $38.39 on the last check Tuesday.
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