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November 24, 2022

The demand for nutritious and healthy products is growing as maintaining good health becomes a priority for consumers. This trend works well for companies in the Zacks Natural Foods Products industry. Industry participants increase the strength of their portfolio through successful innovations and acquisitions. Several players are also making increased investments to increase digital opportunities.

Natural food companies adopt strategic pricing to counter rising cost inflation. Such advantages can work well for companies such as Performance Food Group Company PFGC, Sprouts Farmers Market, Inc. SFM and SpartanNash Company SPTN.

The Zacks Natural Foods Products industry includes companies that produce and sell a wide range of organic and natural fruits, vegetables, dairy products, flour, bakery products, meat and seafood, as well as spices and condiments. They also offer ready-to-eat ready meals, snacks, breakfast cereals and frozen foods. Some of these companies offer comfort foods such as ice cream and soups. Several players provide personal care products as well as health supplements. Companies operating in this space sell their products mainly through wholesalers, distributors, large retail organizations, grocery chains, mass markets, drugstores and e-commerce service providers. Some also support food service channels, including restaurants, cafes, and hotels. Others also offer services to schools, hospitals and caterers. Some players operate through independent retail stores.

Major trends shaping the future of the natural food industry

Growing propensity to choose healthy foods: The pandemic has made the public aware of the importance of eating healthy and nutritious food by cooking at home. As a result, the demand for organic and fresh food products was high, which was an advantage for natural food players. Although outdoor dining is back on the scene, many people will probably still be in the habit of eating natural and organic food at home to maintain good health. Such trends are likely to continue to support the demand for fresh, natural and organic food. Natural food companies are also seeing a revival in their foodservice business channels as demand for restaurants and cafes gathers momentum. Industry experts believe that even when dining outdoors, consumers are likely to choose healthier food options. This is likely to prompt restaurants and cafes to add healthier and more natural, ingredient-based foods to their menus.

Focus on growing your portfolio & Market reach: Companies focused on expanding their portfolio and market presence through strategic partnerships, acquisitions and store expansion. Players in this field are also focusing on research and development to introduce products that can be easily cooked at home and develop recipes that are low in preservatives without compromising on taste. Plant-based, gluten-free and keto-friendly foods are gaining in importance. Companies are increasing production capacity to meet the growing demand for fresh and organic products. Several natural food companies have benefited from higher e-commerce sales thanks to consumers’ growing propensity to shop online. As a result, companies are investing more in digital transformation, including online product offerings, delivery systems, and marketing.

Cost Escalation: Commodity cost inflation is a concern for many players in the natural food industry. The prices of commodities such as cooking oil, vegetables, dairy and animal feed are rising. In addition, companies are experiencing high costs related to operations during the pandemic, such as increased employee salaries to meet health needs, as well as costs related to sanitation and safety measures. Hiccups in the supply chain in some markets have also led to higher warehousing, packaging and other logistics costs. That said, companies are taking initiatives to mitigate cost challenges. These include streamlining operational structures, optimizing production capacity and supply networks, and adopting an effective pricing policy.

Zacks’ industry ranking points to great prospects

The Zacks Natural Foods Products industry is within the broader Zacks Retail – Wholesale sector. The industry is currently ranked 61st in the Zacks Industry Rank, placing it in the top 24% of Zacks’ over 250 industries.

The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member companies, shows a bright short-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor greater than 2 to 1.

The industry’s position in the top 50% of industries in the Zacks ranking is the result of positive profit prospects for the companies included in it combined. Looking at the revisions to aggregate earnings estimates, it seems that analysts are gradually gaining confidence in the earnings growth potential of this group. Since the beginning of August 2022, the industry profit forecast for 2022 has improved by 5.9%.

Given the industry’s solid outlook, here are a few stocks to consider in your portfolio. But before that, it’s worth looking at the results of the industry and the current valuation.

The Zacks Natural Foods Products industry outperformed the broader Zacks Retail – Wholesale sector as well as the Zacks S&P 500 over the past year.

The industry gained 19.4% over the period, as opposed to a sector-wide decline of 29.4% and a 16.4% decline for the S&P 500.

Based on a projected 12-month price-to-earnings (P/E) ratio, which is commonly used to price retail and wholesale stocks, the industry is currently trading at 13.89X versus 17.81X S&P 500 and sector 21.74X .

Over the past five years, the industry has traded as high as 20.31X and as low as 11.82X with a median of 16.54X as the chart below shows

Price-to-Earnings Ratio (Past 5 Years)

3 natural food supplies to watch out for

Sprouts Farmers: This Zacks Rank #2 (buy) company benefits from initiatives focused on product innovation, customer service and targeted marketing with daily great prices and technology. This well-known grocery retailer is constantly expanding its presence in the natural organic space, given the huge demand in this segment. Sprouts Farmers is strengthening same-day delivery capabilities as well as in-store pickup services. Certainly, SFM’s focus on enriching the omni-channel experience bodes well. The Zacks Consensus estimate for Sprouts farmers’ profits and sales for the current fiscal year suggests an increase of 4.6% and 9.5%, respectively, over the figure reported for the year-ago period. Earnings consensus is a jump of 3.1% in the last 30 days. Sprouts Farmers shares are up 22.3% over the year.

You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: SFM

Performance Food Group: The company innovates products and makes acquisitions to increase market share. The Core-Mark acquisition benefits Performance Food, which distributes and markets food and food-related products. Moreover, the effective sales prices of PFGC in the face of rising cost inflation were an advantage. Notably, the Zacks Consensus Estimate for Performance Food’s earnings and sales for the current fiscal year show an increase of 43.1% and 14.4%, respectively, over the previous year’s figures. Earnings consensus is a jump of 10.7% in the last 30 days. The shares of this Zacks Rank #2 company are up 31.7% over the past year.

Price and Consensus: PFGC

SpartanNash: Zacks Rank #3 (hold) shares are up 29.7% over the year. SpartanNash benefits from its focus on its People First culture, achieving operational excellence and meeting customer needs. Efficient pricing also works well for SPTN, a food and beverage solutions company. The Zacks Consensus Estimate of SpartanNash’s top and bottom lines for the current fiscal year suggest an increase of 7.4% and 38.8%, respectively, over the number reported for the year-ago period. Earnings consensus is about a 4% jump in the last 30 days.

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Performance Food Group Company (PFGC): Free stock analysis report

SpartanNash Company (SPTN): Free stock analysis report

Sprouts Farmers Market, Inc. (SFM): Free Stock Analysis Report

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