Despite continually high inflation and the subsequent rate rises raising fears about a recession, inelasticity means that the demand for food stays steady. Food stocks are often excellent defensive investments. Therefore, it could be a good option for investors to invest in their favorite quality food stocks, The Hershey Company (HSY), Kellogg Company (K), and Campbell Soup Company (CPB), to reap significant returns.
Federal Reserve Chair Jerome Powell has reiterated to the market many times that the central bank will keep interest rates elevated until inflation is under control, even if an economic downturn occurs. According to the Bloomberg recession probability forecast, 65% of participants forecasted the probability of a U.S. recession within the next year. As of now, the annualized Personal Consumption Expenditure (PCE) of 5%, although lower than in January, is still far too high relative to the Fed’s stated 2% target.
While other industries have been hammered by the economic turmoil, food maker companies are often likely to maintain their profit margins as these businesses are non-cyclical in nature and enjoy inelastic demand for their offerings. The global food market is already worth more than $9 trillion in 2023 and continues to expand at a healthy clip as the population grows.
Moreover, the U.S. confectionery and snacks segment has a market volume of $299.50 billion in 2023. The revenue in this segment is expected to grow annually by 3% CAGR through 2023-2027.
Given the volatility in the financial sector and rising interest rates, investors are looking for stocks with defensive qualities. Thus, investing in nostalgic quality food stocks HSY, K, and CPB with risk-averse traits can help calm their fears.
The Hershey Company (HSY)
Leading chocolate manufacturer HSY produces snacks, mints, chocolate, non-chocolate confectionery, and pantry items. The company operates through three segments: North America Confectionery; North America Salty Snacks; and International.
On March 30, HSY announced a six-year extension with CBS Sports, Warner Bros. Discovery Sports, and the NCAA as the "Official Confectionary Partner." The extended agreement would designate two of HSY's expanding salty snack brands: Dot's Homestyle Pretzels and SkinnyPop Popcorn, as the NCAA's "Official Pretzel and Popcorn Partner."
In the same month, HSY introduced two new plant-based additions to HSY's and Reese's brands: Reese's Plant Based Peanut Butter Cups and Hershey's Plant Based Extra Creamy with Almonds and Sea Salt. These newest chocolate confections made with dairy alternatives are expected to attract chocolate lovers looking for plant-based alternatives.
On March 15, the company paid quarterly dividends of $1.036 on the common stock and $0.942 on the Class B common stock, marking the 373rd and 154th consecutive regular dividends on the common stock and Class B common stock, respectively. HSY’s four-year average dividend yield is 1.94%, and its current dividend of $4.14 translates to a 1.61% yield on prevailing prices.
Its dividend payouts have grown at a 9.7% CAGR over the past three years and a 9.2% CAGR over the past five years. Also, it has a record of 13 years of consecutive dividend growth.
In terms of trailing-12-month HSY’s gross profit margin of 43.18% is 31.4% higher than the 37.63% industry average. Likewise, its trailing-12-month EBIT margin of 21.61% is 183% higher than the industry average of 7.64%.
HSY’s net sales increased 14% year-over-year to $2.65 billion in the fourth quarter that ended on December 31, 2022. Its adjusted gross profit rose 14.6% from the prior-year quarter to $1.16 billion.
The company’s non-GAAP operating profit grew 16.7% from the year-ago value to $555.35 million, while its non-GAAP net income increased 18.6% year-over-year to $417.11 million. Also, the company’s non-GAAP EPS came in at $2.02, up 19.5% year-over-year.
Street expects HSY’s EPS and revenue to increase 5.4% and 8.7% year-over-year to $2.67 and $2.90 billion, respectively, for the fiscal first quarter (ended March 31, 2023). It surpassed the EPS and revenue estimates in each of the trailing four quarters. The stock has gained 17.6% over the past year to close the last trading session at $257.16.
HSY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Among the 82 stocks in the B-rated Food Makers industry, it is ranked #24. HSY is also rated a B in Sentiment and Quality. To see additional POWR Ratings for Growth, Value, Momentum, and Stability for HSY, click here.
Kellogg Company (K)
K manufactures and sells convenience foods and snacks such as crackers, crisps, savory snacks, toaster pastries, cereal bars, granola bars and bites, ready-to-eat cereals, frozen waffles, veggie foods, and noodles. It operates through four segments: North America; Europe; Latin America; and Asia Middle East Africa.
Recently, Frankford Candy, the leader in manufacturing and marketing licensed confections and gifts, teamed up with K to bring two new king-size Kellogg's® Rice Krispies® Candy Bars to the candy aisle this spring. Such flavorsome additions will likely witness high demand.
On March 23, K and Eva Longoria collaborated to launch breakfast for all bundles. Eva’s Breakfast for All Bundle features some of Kellogg's breakfast favorites alongside a commemorative item signed by Eva. This marketing strategy is expected to not only help create a positive image for the company but also increase revenue in the process.
In the same month, K paid a dividend of $0.59 per share to its shareholders, marking the 393rd dividend that it has paid since 1925. Its dividends have grown at 1.2% and 1.9% CAGRs over the past three and five years, respectively. K’s annual dividend of $2.36 translates to a 3.52% yield on prevailing prices, while its four-year average dividend yield is 3.55%. Also, the company has a dividend growth of 18 consecutive years.
In terms of trailing-12-month K’s net income margin of 6.27% is 70.5% higher than the 3.68% industry average. Likewise, its trailing-12-month levered FCF margin of 5.56% is 109.6% higher than the industry average of 2.65%.
K’s reported net sales came in at $3.83 billion for the fiscal fourth quarter that ended December 31, 2022, up 12% year-over-year. Its adjusted operating profit increased 16.6% year-over-year to $421 million. Also, its adjusted EPS came in at $0.94, up 13.3% year-over-year.
The consensus revenue estimate of $3.95 billion for the fiscal first quarter (ended March 31, 2023) represents a 7.7% year-over-year increase. Its EPS is expected to amount to $1 in the same period and grow by 2.4% per annum over the next five years. The company has an impressive earnings surprise history, surpassing the consensus EPS and revenue estimates in each of the trailing four quarters.
Over the past month, the stock has gained 2.7% to close the last trading session at $67.11.
K’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. It has a B grade for Stability. Within the same industry, it is ranked #26.
Click here to see the additional ratings for K (Growth, Value, Momentum, Sentiment, and Quality).
Campbell Soup Company (CPB)
CPB produces and sells food and beverage both domestically and internationally. Meals & Beverages and Snacks segments make up the company's business. It distributes its goods through retail food chains, big-box retailers, club shops, drug stores, and e-commerce stores.
On March 1, the company announced a quarterly dividend of $0.37 per share, payable to its shareholders on May 1, 2023. The company’s four-year average dividend yield is 2.99%, and its current dividend of $1.48 translates to a 2.68% yield on the prevailing prices.
The stock’s trailing-12-month net income margin and levered FCF margin of 8.86% and 8.51% are 140.9% and 220.6% higher than the 3.68% and 2.65% industry averages, respectively. Also, its trailing-12-month ROCE of 23.40% compare to the industry average of 10.56%.
CPB’s net sales came in at $2.49 million for the fiscal second quarter that ended on January 29, 2023, up 12.5% year-over-year. The company’s adjusted EBIT and non-GAAP attributable net earnings increased 8.4% and 15.9% from the year-ago values to $317 million and $241 million, respectively. Also, its adjusted EPS came in at $0.80, representing a 15.9% increase year-over-year.
Analysts expect CPB’s revenue to increase 5.1% year-over-year to $2.24 billion in the fiscal third quarter (ending April 2023). In addition, its EPS and revenue are expected to increase by 5.7% and 9.1% year-over-year to $3.01 and $9.34 billion, respectively, for the fiscal year 2023. Moreover, it surpassed the consensus EPS estimates in three of the trailing four quarters.
CPB’s shares have gained 22.4% over the past year to close the last trading session at $55.15.
CPB’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. It also has a B grade for Quality. Out of 82 stocks in the same B-rated industry, it is ranked #25.
Click here to see the other ratings of CPB for Growth, Value, Momentum, Stability, and Sentiment.
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HSY shares were trading at $257.86 per share on Tuesday afternoon, up $0.70 (+0.27%). Year-to-date, HSY has gained 11.84%, versus a 7.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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