Three stocks to benefit as healthy-eating trend begins to sprout

These food companies are well positioned to benefit from the long-term growth of the thriving organic marketplace.

Vikram Barhat 21 February, 2018 | 6:00PM
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There's a big shift taking place in global food consumption. A growing number of consumers are picking healthier and cleaner food over tasty and convenient fare. The trend is driving exponential growth in demand for organic foods, which are produced without the use of pesticides and chemical fertilizers.

The global organic food & beverage market is projected to skyrocket to US$320.5 billion by 2025, from US$77.4 billion in 2015, according to a report by Grand View Research, Inc., a U.S.-based market research and consulting company. The U.S., the biggest single consumer market for organic food, saw total organic food sales jump 8.4% year over year to reach US$43 billion in 2016, far outstripping the stagnant 0.6% growth rate in the overall food market, according to a report from the Organic Trade Association (OTA). Yet, according to OTA, organic food accounts for only 5.3% of total food sales in the U.S.

That's about to change. "Growing awareness regarding the health benefits of organic food consumption, rising per capita spending on organic food products and increasing health concerns due to a growing number of chemical poisoning cases are expected to drive global organic food market in the coming years," according to a report by TechSci Research.

As a result, food producers are aggressively investing in product innovation and are making strategic acquisitions as they scramble to align their offerings with consumer demand for healthy foods. The following companies are well positioned to benefit from the long-term growth of the thriving organic marketplace.

 

General Mills Inc.
Ticker: GIS
Current yield: 3.46%
Forward P/E: 17.2
Price: US$55.86
Fair value: US$61
Data as of Feb. 20, 2018

 General Mills (GIS) manufactures branded consumer foods and owns popular brands including Cheerios, Betty Crocker, Haagen-Dazs, Pillsbury, Nature Valley, Annie's and Yoplait. It operates in multiple product categories, including cereal (17% of sales) -- where it owns three of the top five brands in the U.S., yogurt (15%), baking mixes (11% ) and grain snacks (40% market share). North America contributes roughly two thirds of sales and three fourths of operating profits.

In addition to expanding across geographies, General Mills has been "pursuing growth in more on-trend categories like natural and organic products," says a Morningstar report. The firm, whose portfolio of organic foods includes Annie's Homegrown, Cascadian Farm, Larabar and Muir Glen, "plans to reach US$1.5 billion in natural and organic sales (9% of forecast sales) by fiscal 2020, which should further align its portfolio with changing consumer preferences for healthier fare," says the report.

The firm will face completive pressures in the consumer foods space, but may counter them by pursuing "tie-ups to prop up sales in faster-growing categories, such as natural and organics, and enhance its scale in developing markets," says Morningstar equity analyst Sonia Vora.

Referring to the firm's US$820 million buyout of organic foods company Annie's, Vora says General Mills' recent acquisitions have been strategically sound and will bolster "its presence in the attractive natural and organics category," a segment which has "posted 12% compound annual sales growth over the decade."

The stock is trading at more than a 10% discount to Vora's US$61 fair value estimate, and, combined with its attractive dividend yield, offers "an attractive entry point for investors," says Vora.

 

Hormel Foods Corp.
Ticker: HRL
Current yield: 2.03%
Forward P/E: 19.5
Price: US$33.79
Fair value: US$36
Data as of Feb. 20, 2018

Regarded as the king of the refrigerated aisle,  Hormel (HRL) makes a variety of food products, primarily pork and turkey. Its health and nutrition product portfolio includes organic protein powders and shakes (sold under the Muscle Milk brand), organic chicken breast (Valley Fresh), organic peanut butter cups (Justin's) and organic chicken nuggets (Applegate). The U.S. makes up 94% of its total sale.

Hormel has been boosting its organic and natural food offerings through a number of acquisitions including Applegate Farms, an organic-meats brand, Skippy peanut butter, and more recently, Columbus Manufacturing, a producer of salami and deli committed to using meat from animals raised without antibiotics.

"By acquiring Applegate, Hormel further aligned itself with fast-growing trends, expanding its natural, organic and antibiotic-free brand suite," says a Morningstar equity report. "The acquisition should keep Hormel relevant with a wide swath of emerging natural food buyers while hedging against a reversal of the still-nascent health trend."

While health-friendly labels Jennie-O Turkey and Applegate allow access to previously untapped areas, a potential growth opportunity lies in Spam and Skippy brands that have international appeal, and present opportunities for global expansion, says the report.

Through innovation and acquisition, Hormel has successfully diversified its revenue streams away from commodity meat processing, says Morningstar equity analyst Zain Akbar, pointing to the company's Jennie-O turkey brand which stands to benefit from a consumer shift away from beef toward leaner protein.

Akbar, who recently raised the stock's fair value from US$33.50 to US$36, stresses that a five-year average return on invested capital of 20% and a conservative balance sheet "reflect [Hormel's] attractive economic positioning."

 

Sprouts Farmers Market Inc.
Ticker: SFM
Current yield: -
Forward P/E: 22.2
Price: US$26.27
Fair value: US$24
Data as of Feb. 20, 2018

 Sprouts Farmers Market (SFM) sells natural and organic food including fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, dairy products, frozen foods and other items catering to consumers' growing interest in health and wellness.

Sprouts offers approximately 90% of products in the natural and organic realm and prices produce lower than conventional competitors, which drives recurring traffic and quicker turns, says a Morningstar report.

"The firm strives to drive traffic to its stores by offering attractively priced produce (24% of sales) below conventional competitors (10% to 20% lower prices on average), which is the key reason comparable-store sales have been positive for around 40 quarters," says John Brick, equity analyst at Morningstar.

The organic grocer has strong store economics and cash flow generation, which has enabled double-digit top-line growth versus peers at mid-single-digits or less, over the last five years. Moreover, "Sprouts has maintained an eye on growing profitably, as pre-tax cash-on-cash returns are 35% to 40% within three to four years, which is the second-highest on our coverage list," says Brick, who puts the stock's fair value at US$24 and projects 9% top-line growth and just over 5% operating margins on average over the next decade.

The company has been successful at driving traffic and generating average sales growth of 23% over the previous four years. However, Brick cautions that while Sprouts can "sustain impressive growth," the industry competition may prevent it from achieving the outsize levels seen prior.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
General Mills Inc71.24 USD-0.22Rating
Hormel Foods Corp36.31 USD0.61Rating
Sprouts Farmers Market Inc78.57 USD1.54

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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