In a recent report, analysts at RBC Capital Markets discussed trends in the food sector. After meeting with investors over the past several weeks, analysts see several themes developing in the space.
M&A Driving Sector
Headlines in the food sector lately have been dominated by Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B) and 3G Capital Inc. According to the report, the focus on mergers and acquisitions (M&A) can be both exciting and frustrating for investors.
Analysts believe that the wave of M&A activity is far from over, as they predict that the Kraft Foods Group Inc KRFT 1.93%/H.J. Heinz Company (NYSE: HNZ) merger leaves the new Kraft Heinz entity well positioned to make additional acquisitions as soon as late 2016.
In addition, analysts believe that Kraft Heinz may soon be looking to shed non-core brands. They see Outperform-rated Pinnacle Foods Inc PF 1% and B&G Foods, Inc. BGS 1.25% as potential buyers in this scenario.
Challenges Ahead
Investors recognize that high valuations and weak revenue growth opportunities will likely continue to weigh on large-cap food stocks such as Outperform-rated Mondelez International Inc MDLZ 0.92%. However, earnings could be boosted by increasing advertisement efficiency, lower energy-related food costs and relatively low currency drag.
‘Trade-Up Consumer’ Shift
The growing trend toward healthy food has shifted consumers away from traditional weight-management brands, such as The Coca-Cola Co KO‘s Diet Coke, Nestle’s Lean Cuisine and Kellogg Company K 0.3%‘s Special K.
The modern health-conscious consumer is choosing smaller brands and more organic food. According to analysts, food consumers are “listening less to TV and more to friends, trusted retailers and the Internet/social media.” Analysts point out that many smaller, lower-margin brands have been gaining share from the larger brands in the space.
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