Food costs for packaged food companies dipped in September because of the strengthening U.S. dollar, but other factors could pressure food companies going forward, notes Janney Capital Markets analyst Jonathan Feeney.
Cash-strapped consumers and the strengthening dollar’s effect on companies that sell most of their products overseas could pressure food companies going forward. And some companies appear to have stretched margins to the limit and are now seeing declining volumes, Feeney notes.
“As gross margins for the industry remain elevated (80 bps below 10-year peak, 100 basis points above 10-year average), we see the most risk where margins are most above-trend and volumes are most decelerating (General Mills (GIS), Heinz (HNZ).”
Feeney is urging investors to buy stocks that aren’t as vulnerable to consumers trading down to cheaper brands.
“We believe those categories with relatively small store brand presence (e.g., confectionery, cereal) offer the most insulation from trade down, while a 10% decline in the advanced milk price could provide a lift to Dean Foods (DF) and Kraft (KFT). Meanwhile, Hershey (HSY)� is the only food manufacturer whose cost basket is below a year ago, by our estimates.
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