Are you hungry for stock market gains? With Thanksgiving coming up next month, Americans are gearing up for some big holiday feasts. Unfortunately, investors have lost their appetite for many food and beverage stocks this…
Are you hungry for stock market gains?
With Thanksgiving coming up next month, Americans are gearing up for some big holiday feasts. Unfortunately, investors have lost their appetite for many food and beverage stocks this year after earnings numbers and share price performance has mostly lagged the market. These companies will soon be lapping their tax cut savings and will be contending with commodity cost inflation and foreign exchange headwinds in 2019. In a difficult environment, Bank of America analyst Bryan Spillane says investors should focus on key themes of organic growth, consolidation and value. Here are nine food and beverage stocks that fit that description.
Constellation Brands is guiding for fiscal 2019 organic revenue growth of between 2 and 4 percent. The company is a global leader in alcoholic beverages, including premium wine. In addition to its traditional beverage business, Constellation’s recent $4 billion investment in Canadian cannabis producer Canopy Growth Corp. (CGC) gives the company a potential wild-card growth opportunity in the cannabis beverage market. Spillane says STZ stock deserves a market premium over other staples stocks due to its earnings and margin growth potential. Bank of America has a “buy” rating and $240 price target for STZ stock.
PepsiCo reported overall organic sales growth of 4.9 percent in the most recent quarter, including 10 percent growth from the international business and 2.5 percent growth in the sluggish North American market. Spillane says soft drinks and snacks are high-value categories, and PepsiCo has plenty of room to grow in international markets. The key uncertainty in the near term will be whether the new CEO will take 2019 as an opportunity to reset earnings expectations and/or invest in new strategies. Bank of America has a “buy” rating and $125 price target for PEP stock.
Like rival PepsiCo, Coca-Cola is expecting full-year organic revenue growth of at least 4 percent in 2018. Despite foreign exchange headwinds, Coca-Cola is forecasting full-year earnings per share growth at or near double digits. While currency drag will likely continue to eat into international profits, Spillane’s latest checks suggest the domestic business is healthy. Spillane is anticipating a slight EPS miss when the company reports third-quarter numbers on Oct. 30, but 4.5 percent organic revenue growth might help ease investor concerns. Bank of America has a “buy” rating and $52 price target for KO stock.
Lamb Weston, a spin-off of Conagra Brands (CAG), is a leader in frozen potato products, generating $3 billion in annual revenues. In the most recent quarter, Lamb Weston reported impressive 12 percent organic revenue growth, including a 4 percent uptick in volume. The company also eased fears over a poor European potato crop and weak restaurant traffic by reiterating its fiscal 2019 guidance. Spillane says Lamb Weston provides investors with consistent sales growth and expanding margins, a rare combination among packaged foods stocks. Bank of America has a “buy” rating and $75 price target for LW stock.
Spillane is calling for third-quarter organic revenue growth of 1.3 percent from Mondelez International, above consensus expectations of 1 percent. Those numbers include 1.5 percent growth in North America and 2 percent growth in Latin America. In a recent investor conference, Mondelez highlighted its key long-term goals, including consistent sales and profit growth, product innovation, and sales and marketing investment. Mondelez is targeting long-term annual sales growth of 3 percent and at least high single-digit dividend growth. Bank of America has a “buy” rating and $56 price target for MDLZ stock.
Kraft Heinz management is expecting organic sales growth in the second half of 2018, but Spillane says it could also benefit from potential value-added strategic acquisitions. Kraft Heinz’s largest shareholder, Wall Street guru Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B), has a long track record of identifying consolidation opportunities that drive value for investors. Spillane says Kraft Heinz’s premium earnings multiple is justified given its superior earnings growth outlook, margin expansion opportunities and strategic potential. Bank of America has a “buy” rating and $83 price target for KHC stock.
Conagra is the other top consolidation play on Spillane’s radar. Rising costs have eaten into Conagra’s margins in recent quarters, and lackluster sales growth has been driven mostly by pricing rather than volume growth. However, Spillane says Conagra’s strategic optionality should help support the stock and could potentially provide bullish catalysts in the near future. The company’s $10.9 billion buyout of Pinnacle Foods (PF) in June is a perfect example of how Conagra can drive revenue gains via external sources. Bank of America has a “buy” rating and $43 price target for CAG stock.
Spillane says beer giant Molson Coors is one of the most attractive value opportunities in the food and beverage group. The U.S. beer market has been soft in recent quarters, but Spillane says there are signs of improvement. Even valued at a 60 percent forward earnings multiple discount to Constellation, Spillane says there’s more than 30 percent upside to TAP stock. A joint venture with Canada’s The Hydropothecary Corp. gives Molson exposure to the wild-card Canadian cannabis market as well. Bank of America has a “buy” rating and $80 price target for TAP stock.
Coca-Cola European Partners is the world’s largest independent Coca-Cola bottler by volume, and Spillane says it’s his other top value pick in the food and beverage space. He says CCE has the cash flow and strong balance sheet to generate additional value for investors via acquisitions and/or capital returns in the longer-term. The company recently raised its full-year guidance in mid-September, and Spillane says a shift to water, tea, coffee and juices has helped the company mitigate potential sugar tax damage. Bank of America has a “buy” rating and $50 price target for CCE stock.