EconomyFood stocks: price rises keep inflationary pressure at bay,...

Food stocks: price rises keep inflationary pressure at bay, for now

Panic buying drove a sales surge at packaged food companies during the early days of the pandemic. Americans sought out comfort in pantry food staples. Demand slowed last year as people returned to the office and restaurants reopened. But the pressures on cash-strapped consumers could now make them trade in their kale salads for SpaghettiOs once again.

Investors in turn have regained their appetite for underperforming food stocks. Shares in leading processed foodmakers — Kraft Heinz, Campbell Soup, Kellogg and General Mills — are up between 2.5 per cent and 9 per cent this year. This is no small feat given the S&P 500 is down 14 per cent since the start of 2022.

Like other sectors, food companies are grappling with rising prices for everything from transport and packaging to labour and input commodities. Yet, so far at least, they have proved adept at passing the inflationary pressures on to consumers.

Campbell Soup, whose portfolio also includes Pepperidge Farm Goldfish crackers and Kettle potato chips, this week reported a 9 per cent rise in organic sales for its fiscal third quarter. The increase was due entirely to price increases rather than underlying volumes. That helped keep gross margins steady and contributed to the 18 per cent jump in net earnings.

Cereal maker Kellogg’s delivered a 15 per cent rise in profit last month as it pushed through higher prices and held down costs. Kraft Heinz and General Mills will report their results in the coming weeks.

On a forward earnings multiple basis, food stocks have traditionally traded at a discount to the S&P 500. But this valuation gap is closing as investors seek shelter in defensive stocks. This means they are starting to get expensive. Their ability to pass on price rises should not be assumed to hold up indefinitely.

But compared with the cost of a night out or the sticker shock at the fresh grocery aisles, consumers will probably be willing to stump up a little for the comfort of familiar brands.

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