The upcoming earnings season for the food and beverage sector is attracting attention as investors navigate a challenging macroeconomic backdrop. TD Cowen, a leading analyst firm, sheds light on the key themes to consider in this sector. Rising 10-year bond yields and concerns surrounding the long-term impact of GLP-1 weight loss drugs have contributed to a sharp pullback in share prices. However, this presents an opportunity for astute investors to identify stocks with potential.
Analyst Robert Moskow suggests that the devaluation of long duration cash flow assets can be attributed to rising bond yields, with the GLP-1 thesis serving as an additional reason for pessimism. However, retail tracking data does not yet show any signs of volume compression from GLPs. Moskow and his team emphasize that the sell-off in beverage stocks may be an overreaction, given that most beverage consumption is for hydration rather than satiety. They anticipate stronger growth for beverage companies compared to food companies.
Cowen advises investors to steer clear of companies that have high exposure to low-income consumers and private label products. The reduction in pandemic-related government stimulus programs has significantly affected volume sales in staples. It is anticipated that food companies will need to invest in lowering prices to revive volumes, which may impact gross margin. Additionally, in a rising interest rate environment, investors are likely to pay closer attention to balance sheets. Companies like Campbell Soup (CPB) and J.M. Smucker (SJM) that have leveraged up their balance sheets for acquisitions may face skepticism.
High-Conviction Outperform-Rated Stocks
Cowen highlights several food and beverage stocks that it believes are positioned for success:
- Mondelez International (NASDAQ: MDLZ) – This company stands out due to its strong investments and business momentum in developing markets. Its high international exposure mitigates the risk associated with GLP-1 weight loss drugs. Cowen expects Mondelez International to surpass expectations in Q3.
- Freshpet (FRPT) – As a proven disruptor in the premium dog food category, Freshpet has a strong competitive moat in refrigerated fresh products. Despite concerns about consumers trading down, the company’s retail sales growth accelerated to 30% in Q3. Cowen anticipates a positive revision to Freshpet’s EBITDA guidance.
- Celsius Holdings (CELH) – Nielsen data indicates accelerating revenue growth and market share gains for Celsius Holdings, making it a strong contender for a successful Q3 earnings report. Cowen predicts that Celsius Holdings will also surprise investors with its full-year guidance.
- MGP Ingredients (MGPI) – Transformation into an increasingly American whiskey-focused enterprise positions MGP Ingredients for significant revenue growth and operating margin expansion, according to Cowen’s analysis.
RBC Capital also views the food and beverage sector as an attractive investment opportunity and believes that the bear thesis surrounding GLP-1 weight loss drugs is exaggerated. The firm highlights how other feared disruptors in the industry, such as the alternative meat sector and Beyond Meat (BYND), have ultimately fallen short.
For investors seeking highly-rated food stocks, Seeking Alpha Quant Ratings recommends Lifeway Foods (LWAY), Mama’s Creations (MAMA), and Post Holdings (POST). On Wall Street, Steakholder Foods (STKH) and WestRock Coffee Company (WRK) have received unanimous bull ratings. Analyst Manika Premsingh bullish on Whole Earth Brands (FREE), while Lighting Rock Research recommends PepsiCo (PEP).
What to Watch
Coca-Cola (KO) is expected to hold an intriguing earnings conference call on October 24. During the call, executives may discuss various topics, including the consumer environment, tax litigation, strategies for the Costa business, and potential impacts from GLP-1 weight loss drugs. Additionally, Coca-Cola (KO) may provide insights into its plans for alcohol partnerships, as it recently announced a partnership with Pernod Ricard SA (OTCPK:PDRDF) to launch a ready-to-drink pre-mixed cocktail featuring Absolut Vodka & Sprite in 2024. Prepared cocktails have been the fastest-growing category in the distilled spirits market, with brands like High Noon, Anheuser-Busch’s (BUD) Cutwater Spirits, and Jose Cuervo gaining popularity.
As the food and beverage sector faces challenges, there are opportunities for smart investors to identify stocks that can weather the storm and deliver strong returns. By analyzing key themes and considering high-conviction stocks recommended by experts, investors can position themselves for success in this volatile market.