Packaged food stocks experienced a banner year in 2022. The five biggest manufacturers—General Mills, Kraft Heinz, Campbell Soup, Kellogg, and Conagra Brands—on average returned 22% including dividends. On the same basis, the Standard & Poor’s 500 index was down 18%.
Here in 2023, the story has almost exactly reversed. The same five packaged food stocks, again including dividends, are down 19%. The S&P 500 Total Return has risen 18%.
The reason packaged food stocks performed so well last year was because their businesses performed so well. Overall, major manufacturers were able to pass pricing along to consumers—and then some. Despite heavy inflation, profit margins generally stayed stable or even increased.
It would stand to reason, then, that the reason packaged food stocks are struggling in 2023 is that their businesses are struggling. But that’s not really the case—yet.
Ahead of Kraft Heinz’s fourth-quarter earnings in February, for instance, Wall Street expected 2023 earnings per share of $2.77. The figure now is $2.90, nearly 5% higher. Kraft Heinz stock is down 15% since that Q4 report.
In August, Kellogg raised its profit outlook for 2023. The stock is down 10% since then, and 16% so far this year. At the end of that month, Campbell Soup issued guidance for fiscal 2024 (ending July) that was pretty much in line with analyst expectations; despite losing more than 20% of its value to that point in 2023, investors shrugged. Last week, General Mills reaffirmed its guidance for FY24 (ending May); the stock incredibly is down 27% just since mid-May.
Only Conagra, which expects profit per share to decline (if modestly) in the coming fiscal year, has posted truly disappointing results. Yet the entire space has sold off in a manner not usually seen without clear and significantly negative catalysts, such as the 2008-2009 financial crisis or the novel coronavirus pandemic.
Heed the Cautious Consumer
Two factors likely are at play. One is that a forward-looking market is responding to signs that, unlike in 2022, the American consumer is starting to break. Price increases are keeping profit margins intact, but at the cost of volume. Notably, General Mills saw a 6% decline in volume in its most recent quarter, including an 8% fall in its North America Retail segment. Campbell’s volume dropped 5%—and by the same proportion in a snacks business that investors believed would be more resilient.
Indeed, industry executives clearly are taking a more cautious tone here in 2023. It was not uncommon last year for chief executive officers to argue, essentially, that consumer behavior hadn’t changed. No one is making that argument anymore. Consumers are trading down, buying earlier in the month, and focused intently on shelf-stable meals in the center of the store.
But that’s not the entirety of the story. Investor behavior no doubt is at play as well. Starting in March of last year, a ‘risk-off’ attitude began to pervade the equity market. Buyers pivoted sharply from speculative (and often unprofitable) growth stocks in sectors like electric vehicles and software to safer plays. Packaged food stocks fit the bill, even in an inflationary environment.
In 2023, however, many investors again are searching for growth. Again, the S&P 500 is up 18% year-to-date with dividends; the NASDAQ 100 Total Return, which is disproportionately composed of large tech companies, has gained a sizzling 42%. Meanwhile, in an environment with higher interest rates, the 3% to 4% dividend yields of major packaged foods manufacturers look much less attractive.
Simply put, last year both investors and consumers were on the side of branded food companies. Right now, it seems like almost no one is.
Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites for more than a decade. He’s the lead writer at (www.overlookedalpha.com) Overlooked Alpha, which offers market-wide and single-stock analysis every week.
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