Food Trends Turning Tasty?

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Includes: CMG, DENN, DPZ, EAT, GIS, JACK, MCD, PBJ, TSN, WMT, YUM
by: Motif Investing

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Feeling a bit frustrated with how much you're spending on food each month? Perhaps changing your mindset and approaching food as an investment opportunity could be just the silver lining to cheer you up. But where to begin? Two simple approaches to investing in food include: 1) restaurants and; 2) food producers and processors.

As it happens, we have two professionally created motifs that make it easy to gain exposure to food-related stocks: Eating Out and Rising Food Prices.

Food is big business

Thanks to large-scale farms and technological advances in agriculture, the U.S. is the most productive agricultural country in the world. Americans spend about 14 percent on food, while consumers in emerging markets spend between 30 and 70 percent. When investing in food stocks, pay attention to the types of food companies produce, process or serve and where their core consumers are based.1

Generally speaking, experts advise investors buy into companies that are experiencing declining input costs to help boost margins, though in some cases, brand-loyal categories may be a safer, more stable option than those that are highly commoditized and price-driven. Examples of brand-loyal categories include baby food, chocolate candy, yogurt, and cereals. Examples of highly commoditized categories include highly private-label foods like cheese, milk, and cooking oils.2

Large consumer packaged goods (CPG) companies often look to growth by acquiring smaller companies. For instance, CPGs may be challenged launching natural and organic products under their existing brands, so acquisitions can help them gain entrée into new markets.3 So, watching for M&A activities in the industry should help you get a handle on a company's strategy and where CPGs are making their plays.

Trends in food prices

Curious how food expenses have changed over the years? According to the U.S. Department of Agriculture, the moderate cost of food per week for a family of four with young children under the age of five has risen from $157.70 to $204.30 over the last 10 years. That's nearly a 30 percent increase.4

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Weekly cost of food has risen significantly over the last 10 years. Source: USDA

Some food prices have declined over the last year in the U.S., while others have risen. Highlights from the Bureau of Labor Statistics' June CPI report for the twelve-month period June 2015 to June 2016 on the following indexes5:

  • Food at home experienced its largest 12-month drop since February 2010, dropping 1.3 percent.
  • Meats, poultry, fish and eggs declined 5.0 percent.
  • Dairy and related products declined 2.2 percent.
  • Fruits and vegetables rose 1.3 percent.
  • Food away from home rose 2.6 percent.

How are food prices trending in other parts of the world? Most countries are experiencing rising food prices. For the 12-month period, June 2015 to June 2016, food prices increased 0.1 percent in Germany, 0.6 percent in France, 2.7 percent in Hong Kong, 4.6 percent in China, 7.79 percent in India and 12.81 percent in Brazil.6

Although the United Kingdom had a 12-month drop in food prices of 2.9 percent in June, prices could be rising soon due to Brexit.7 Former British retail executives project that the drop in the British pound and supply chain disruptions could raise the price of food, drink and clothing for U.K. residents.8

With the U.S. and so many countries around the world experiencing food inflation, stocks in the Rising Food Prices motif could benefit. The motif's one-month return was 9.1 percent and outperformed the S&P 500 by being up slightly higher than 28 percent in the last 12 months. The sectors the Rising Food Prices motif focuses on include packaged foods companies, meat processors, dairy processors, fruits and vegetables growers and crop processors.

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The Rising Food Prices motif is comprised largely of packaged foods companies along with meat processors, dairy processors, fruits and vegetables growers and crop processors.

General Mills Inc. (NYSE:GIS), a top-weighted stock in the motif's packaged foods sector, has had strong earnings growth, expanding profit margins and growth in net income. The stock, however, took a hit last week when it announced restructuring plans that could close plants in the U.S. and Brazil and cut 1,400 jobs.9

Tyson Foods, Inc. (NYSE:TSN), a top-weighted company in the motif's meat processors sector, is another stock that has performed well. The stock reached a record last week and has outpaced the S&P 500 over the past year. Tyson has had positive earnings per share growth over the past two years, and its net operating cash flow has increased by 350 percent compared to the same quarter last year.10

Eating out growth trends

Historically, Americans have spent more on groceries than on eating out. Last year, however, U.S. retail spending at eating and drinking establishments surpassed spending at grocery stores for the first time ever.

U.S. retail spending on eating out has surpassed spending at grocery stores and continues to rise. Source: Quartz

There are several key reasons for this shift. One, U.S. grocery stores, including relatively new entrants like Wal-Mart (NYSE:WMT), are competing with the super-low prices of dollar stores. Second, with more women in the workforce, most singles and dual-earning couples are crunched for time, so consuming ready-made food at restaurants is a matter of convenience.

Third, Millennials - the largest generation in American history - eat out 3.4 times a week versus 2.8 times a week for non-Millennials, according to a Boston Consulting Group report. This influential generation also prefers ordering takeout over sitting down to eat at the restaurant, but they tend to eat out with co-workers and friends more than other generations.11

Should this trend prove sustainable, it could bode well for restaurant stocks. The Eating Out motif rose 10.3 percent in the last month, and its 12-month performance is about even with S&P 500's by being up 7. 7 percent. This motif is focused on fast food companies, casual dining restaurants, cafes, bakeries and fine dining.

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The Eating Out motif invests in fast food companies, casual dining restaurants, cafes, bakeries and fine dining establishments.

Fast food restaurants have had it rather rough lately. For example, Chipotle (NYSE:CMG) has suffered three consecutive quarters of same-store sales declines. Its negative publicity from multiple food safety issues over the last year have taken their toll. Chipotle's profits for Q2 2016 were only $25.6 million, compared to $140.2 million in Q2 2015. The company estimates it could take anywhere between 18 months to two years to recoup sales.12

Meanwhile, other fast food chains like Taco Bell, owned by Yum Brands (NYSE:YUM), and Qdoba, owned by Jack In The Box (NASDAQ:JACK), have spent a lot of money on marketing promotions to try and lure in wary Chipotle customers, and their profits margins have taken a hit as a result.13

Although many fast food and casual dining restaurants have suffered double-digit losses over the last twelve months, the popularity of dining out could help them stage a comeback. As of July 22, the one-month performance of Domino's Pizza (NYSE:DPZ) is up 15.4 percent, McDonald's (NYSE:MCD) is up 5.4 percent, Brinker International (NYSE:EAT) is up 5.5 percent and Denny's (NASDAQ:DENN) is up 5.4 percent.

1. Delfeld, Carl, "Back to basics: Investing in food and water," Wall Street Daily, April 5, 2016.

2. Hailstorm, Sara, "The angel investor's guide to investing in food," CircleUp, May 27, 2015.

3. Ibid.

4. Center for Nutrition Policy and Promotion, "USDA Food Plans: Cost of Food," United States Department of Agriculture, July 23, 2016.

5. Bureau of Labor Statistics, "Consumer Price Index - June 2016," U.S. Department of Labor, July 15, 2016.

6. Trading Economics, "Food Inflation," Trading Economics, July 23, 2016.

7. Ibid.

8. BBC News, "Brexit would mean higher food prices, warn former retail bosses," BBC News, June 21, 2016.

9. Walters, Natalie, "General Mills (GIS) stock retreats after announcing possible 1,400 job cut," The Street, July 21, 2016.

10. The Street, "Tyson Foods (TSN) reaches new lifetime high today," The Street, July 22, 2016.

11. Baer, Drake, "Americans spend more on restaurants than groceries, because of huge social changes," New York Magazine, June 15, 2016.

12. Strom, Stephanie, "Chipotle's rough spell is no help for its rivals," The New York Times, July 21, 2016.

13. Ibid.

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