Most of the larger food stocks find themselves in a secular decline. Packaged foods from the likes of Kellogg Company (NYSE:K), General Mills, Inc. (NYSE:GIS) and Kraft Heinz Co (NYSE:KHC) have become less popular. As a result, these companies have experienced secular revenue declines despite growing populations.
However, not all food stocks have fallen into this trap. Some companies have been able to increase sales amid rapidly changing consumer tastes. Best of all for new investors, valuations for many of these stocks remain low.
The following four stocks can provide investors with profit growth as consumers increasingly embrace fresher foods:
Food Stocks to Buy: McCormick (MKC)
McCormick & Co/SH SH NV (NYSE:MKC) provides herbs, spices and flavorings for the consumer and commercial markets. The Sparks, Maryland-based food company has benefited from new product lines, higher pricing and, of course, lower taxes.
Revenue has increased by about 3.8% on average over the last five years. While that number will impress only the most conservative investors, it shows a marked improvement over many food stocks.
The stock trades at a forward price-to-earnings (P/E) ratio of 20. That might appear high compared to peers. However, net income is experiencing something highly unusual for food stocks — it currently enjoys double-digit profit growth. After seeing earnings per share (EPS) of $4.26 in 2017, analysts expect the company to earn $4.93 per share this year. They also expect double-digit growth to continue through at least 2020.
This year will mark the 32nd year the company has increased the MKC stock dividend. This brings the annual dividend to $2.08 per share. This gives investors a dividend of 2%, which slightly exceeds S&P 500 averages.
Dividend aristocrat status is not unusual for food stocks. However, with its peers seeing shrinking revenue and profits, some competitors could lose this status. McCormick faces no such danger. Although it stands as one of the more expensive stocks in the food industry, with its double-digit EPS growth and dividend aristocrat status, investors in food stocks should keep MKC stock on their watch lists.
Food Stocks to Buy: Pilgrims Pride (PPC)
Pilgrims Pride Corporation (NASDAQ:PPC) has become the largest chicken producer in the United States and the second-largest in Mexico. Despite exiting a bankruptcy in 2009, the chicken company is now owned by a Brazilian company. It bases its U.S. headquarters in Greeley, Colorado. It supplies chickens to Yum! Brands, Inc. (NYSE:YUM) subsidiary KFC, as well as Walmart Inc (NYSE:WMT), Costco Wholesale Corporation (NASDAQ:COST) and many other companies.
The public enjoys chicken and still sees the white meat as a healthy alternative to beef. This fact allows PPC stock to increase its revenue. Average revenue growth has stood at about 5.8% per year over the last five years. The company saw volatile profit growth over the previous five years. Profits have stabilized, though analysts expect EPS to grow by 1%-2% in future years.
However, along with the lower profit growth comes a cheap valuation. Expected 2018 earnings of $2.89 per share will take the forward P/E ratio to 7. Also, PPC stock tends to beat earnings in most quarters. Hence, that could bring earnings growth closer to parity with its revenue growth. Although its slower growth might disappoint investors, the growing demand for chicken along with its low P/E should help PPC outperform other food stocks.
Food Stocks to Buy: Nomad Foods Ltd (NOMD)
Nomad Foods Ltd (NYSE:NOMD), a niche frozen-food startup headquartered in the UK, has enjoyed explosive growth. Its mission is to provide, “great tasting, easy to prepare, nutritious food.”
The company leads in the frozen food business in Europe and enjoys widespread brand recognition. They claim they have “built moats” around their products. Due to the wide availability of food choices, building a moat in this industry remains difficult. Still, NOMD has achieved impressive growth, indicating they have developed a deep understanding of what their customers want.
The company was founded in 2014 and launched its IPO in 2016. Despite, its brief existence, its market cap stands at over $3.1 billion. After seeing $2.4 billion in sales in 2017, Wall Street expects revenue to grow to $2.54 billion. Net income will see a more dramatic increase. The company earned $1.22 per share in 2017. Analysts expect that figure to rise to $1.40 in 2018, a 14.75% growth rate. After 2018, consensus estimates forecast an EPS growth rate of about 10% per year in 2019 and 2020.
This will take the forward P/E to about 12.8 at current prices. This also brings the price-to-earnings-to-growth (PEG) ratio under one, an unusual occurrence for food stocks. With a low PEG ratio and double-digit earnings growth, NOMD will stand out among food stocks for the foreseeable future.
Food Stocks to Buy: United Natural Foods (UNFI)
United Natural Foods Inc (NASDAQ:UNFI) distributes organic, natural, and specialty foods throughout North America. Private label brands, perishables, nutritional supplements and personal care products are among the company’s offerings. This focus on these product lines has helped the Providence, Rhode Island-based wholesaler to stand out among food stocks.
Revenue growth has averaged over 12.1% over the last five years. Profit levels have struggled to keep up over the last few years. However, analysts expect 2018 will see profit growth of around 20%. They also expect double-digit growth to continue into next year, before slowing into the single-digits in 2020.
Despite this growth, valuation metrics remain compelling. The forward P/E stands at about 13, a multiple that also will take the PEG ratio below 1.5. It also trades barely above book value, with the price-to-book ratio holding at about 1.2. The fact that United Natural Foods and most food stocks support weak moats may play into the low ratios. However, with the growth trajectory of this company remaining strong for the next few years, UNFI stock should perform well, especially compared to its peers.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.