Prepare for Labor Day With Three Food Processing Stocks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three food processing stocks. With the supply chain issues and labor shortages, should you consider these three food processing stocks of Kraft Heinz Co., J.M. Smucker Co. and Tyson Foods Inc.?
Food Processing Stocks Recent News
Innovation in food processing technology and an upsurge in the demand for processed food are expected to drive the market over the next few years. The industry is projected to reach $236 billion by 2028 with a compound annual growth rate (CAGR) of 6.6%. Dietary shifts including increasingly prominent health-conscious diets in both developed and developing countries are also predicted to fuel growth.
Despite the long-term growth outlook, supply chain struggles that began during the pandemic persist. Additionally, it has been difficult to predict the availability of products. Due to this, many companies have to act as their own suppliers and source their own goods. Food processors hope this will help them deal with demand better.
Food processors, like other companies, have also had to deal with inflation struggles. Protein prices have increased significantly, with chicken and beef seeing double-digit price increases. This has put pressure on margins; however, companies have largely been able to pass the added costs on to consumers.
As food manufacturers struggle to find labor, automation is coming to the forefront as a solution to help address this challenge. While the market recognized the opportunity years ago, the food processing industry wasn’t ready. The past 18 months helped prepare more processors for this change.
Overall, the food processing industry may face challenges over the next 12 months. However, long-term growth looks positive as companies adapt to changing consumer trends. Although supply issues may persist, one of the benefits of being in the food processing industry is that there will always be demand — people will always need food.
Grading Food Processing Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three food processing stocks — Kraft Heinz, J.M. Smucker and Tyson Foods — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Food Processing Stocks
What the A+ Stock Grades Reveal
Kraft Heinz Co. (KHC) is a global food and beverage company. Its segments include U.S., international and Canada. The company manufactures and markets food and beverage products, including dairy products, meat products, coffee beans, soybean and vegetable oils, sugar and other sweeteners, tomatoes, potatoes, corn products, wheat products, and nuts and cocoa products. Its products are sold through its own sales organizations and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, drug stores, value stores, bakeries, pharmacies, mass merchants, club stores and institutions. The company’s products are also sold online through various e-commerce platforms and retailers. Kraft Heinz offers its products under various brands, such as Kraft, Oscar Mayer, Heinz, Philadelphia, Lunchables, Velveeta, Maxwell House, Kool-Aid, Ore-Ida, Jell-O, Master, Quero, Golden Circle and Wattie’s.
The company has a Value Grade of C, based on its Value Score of 48, which is considered average. Lower scores indicate a more attractive stock for value investors and, thus, a better grade.
Kraft Heinz’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 18 for shareholder yield, 21 for the price-to-book-value (P/B) ratio and 46 for the price-to-sales (P/S) ratio, with the lower the score the better for value. The company has a shareholder yield of 4.1%, a price-to-book-value ratio of 0.96 and a price-to-sales ratio of 1.79. The ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) is 11.5, which translates to a score of 57.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow ratio and the price-earnings (P/E) ratio.
Kraft Heinz has a Momentum Grade of B, based on its Momentum Score of 77. This means that it ranks strongly in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 3.8% in the most recent quarter, negative 1.1% in the second-most-recent quarter, 25.2% in the third-most-recent quarter and negative 9.4% in the fourth-most-recent quarter. The scores are 61, 64, 88 and 49 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 4.4%, which translates to a score of 77. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
The company has a Quality Grade of B, based on its Quality Score of 76. Kraft Heinz has a score of 80 for change in total liabilities to assets, 76 for the F-Score and 72 for return on invested capital (ROIC). The company has a change in total liabilities to assets of negative 4.5%, an F-Score of 6 and a return on invested capital of 36.3%. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The high scores are partially offset by a low gross income to assets of 8.9%. In addition, Kraft Heinz has a Growth Grade of D based on a poor five-year earnings per share growth rate of negative 25.8% and a five-year sales growth rate of negative 0.2%.
J.M. Smucker Co. (SJM) is a manufacturer and marketer of food and beverage products. Its segments include U.S. retail pet foods, U.S. retail coffee and U.S. retail consumer foods. J.M. Smucker’s products include coffee, cat food, pet snacks, dog food, peanut butter, frozen handheld products, fruit spreads, portion control products, juices and beverages, as well as baking mixes and ingredients. The U.S. retail pet foods segment includes Rachael Ray Nutrish, Meow Mix, Milk-Bone, 9Lives, Kibbles ’n Bits, Pup-Peroni and Nature’s Recipe branded products. The U.S. retail coffee segment primarily includes the domestic sales of Folgers, Dunkin’ and Cafe Bustelo branded coffee. The U.S. retail consumer foods segment primarily includes the domestic sales of Smucker’s and Jif branded products. Its distribution facilities are located across Pennsylvania, New York, Alabama, Washington, Kansas, Kentucky, Colorado, Tennessee, Louisiana, Ohio, California, Quebec and Virginia.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
J.M. Smucker has a Quality Grade of A with a score of 84. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital, gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its F-Score and buyback yield. J.M. Smucker has an F-Score of 7 and a buyback yield of 1.6%. The sector median F-Score and buyback yield are 4 and negative 0.4%, respectively. However, J.M. Smucker ranks poorly in terms of its gross income to assets, in the 39th percentile.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, J.M. Smucker has an Earnings Estimate Revisions Grade of A, which is very positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
J.M. Smucker reported a positive earnings surprise for first-quarter 2023 of 31.3%, and in the prior quarter reported a positive earnings surprise of 18.6%. Over the last month, the consensus earnings estimate for the second quarter of 2023 has increased from $2.172 to $2.197 per share due to four upward and five downward revisions. Over the last three months, the consensus earnings estimate for full-year 2023 has increased 5.6% from $8.057 to $8.505 per share based on 10 upward revisions.
The company has a Value Grade of D, based on its Value Score of 63, which is considered expensive. This is derived from a very high price-to-free-cash-flow ratio of 165.7 and a high price-earnings ratio of 25.8, while the sector median price-earnings ratio is 19.0. In addition, J.M. Smucker has a Growth Grade of D based on weak quarterly year-over-year operating cash flow growth of negative 128.3% and a weak five-year sales growth rate of 1.6%.
Tyson Foods Inc. (TSN) is a protein-focused food company. Its segments include beef, pork, chicken and prepared foods. The beef segment includes its operations related to processing live fed cattle and fabricating dressed beef carcasses into primal and sub-primal cuts and case-ready products. It also includes sales from allied products such as hides and variety meats, as well as logistics operations to move products through the supply chain. The pork segment includes operations related to processing live market hogs and fabricating pork carcasses into primal and sub-primal cuts and case-ready products. The chicken segment includes domestic operations related to raising and processing live chickens into, and purchasing raw materials for, fresh, frozen and value-added chicken products, as well as sales from allied products. Prepared foods includes operations related to manufacturing and marketing, frozen and refrigerated food products and logistics operations to move products through the supply chain.
Tyson Foods has a Quality Grade of A with a score of 82. The company ranks strongly in terms of its return on assets, change in total liabilities to assets and F-Score. Tyson Foods has a return on assets of 11.2%, a change in total liabilities to assets of negative 6.1% and an F-Score of 7. The industry average change in total liabilities to assets is significantly worse than Tyson Foods’ at 3.2%. The company also ranks below the industry median for gross income to assets and buyback yield.
Tyson Foods has a Momentum Grade of C, based on its Momentum Score of 60. This means that it is average in terms of its weighted relative strength over the last four quarters. This score is derived from a relative price strength of negative 10.0% in the most recent quarter, negative 3.8% in the second-most-recent quarter, 29.6% in the third-most-recent quarter and negative 2.5% in the fourth-most-recent quarter. The scores are 31, 59, 91 and 66 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 0.7%, which translates to a score of 60.
Tyson Foods reported an earnings surprise for third-quarter 2022 of negative 1.9%, and in the prior quarter reported a positive earnings surprise of 20.0%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has decreased from $1.950 to $1.774 per share due to nine downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has decreased 2.0% from $9.034 to $8.853 per share, based on one upward and nine downward revisions.
The company has a Value Grade of B, based on its Value Score of 39, which is in the value range. This is derived from a very low price-to-sales ratio of 0.53 and a low price-earnings ratio of 7.0, which rank in the 17th and 16th percentile, respectively. Tyson Foods has a Growth Grade of C based on a score of 44. The company has a strong five-year operating cash flow growth rate of 7.2%. However, this is offset by a low quarterly operating cash flow growth rate of negative 49.0%.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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