Kellogg, General Mills and JM Smucker were handed ‘outperform’ ratings on their stock yesterday (21 May) after stockbrokers RBC Capital Markets began its coverage of the packaged food sector.
The US food giants are among a clutch of companies, which also include Kraft Foods, HJ Heinz and Campbell Soup Co., to be monitored by RBC, which has an optimistic view of the sector in the months ahead.
“A multi-decade trend of market share loss to restaurants has begun to reverse course,” RBC said yesterday (21 May). “While we expect some volatility in this metric around the economic cycle, we see potential for above-trend growth from a longer-term perspective.”
Analysts Edward Aaron and Brant Jaouen said Kellogg and General Mills are set to have a positive few months, while they argued last year’s acquisition of the Folgers coffee business should boost Smucker.
“We like the set-up on Kellogg this year as business momentum is accelerating going into a period of easy comparisons. We believe sentiment on General Mills has turned from overly positive to overly negative, and we expect GIS to meet or beat estimates despite competitive pressure in key categories,” they wrote.
“We also favour Smucker, given the merits of the Folgers acquisition and a compelling cash-flow valuation.”
The analysts handed Kraft and Heinz a ‘sector perform’ rating. Kraft’s progress in turning around the business had given the analysts “encouragement”, the analysts said, but they had “trouble arguing for a premium valuation”.
Aaron and Jaouen added: “Our hesitation on Heinz is more of a timing issue. While currency issues are well understood, we think FY-10 estimates might still be a bit too high.”
Campbell Soup Co., which yesterday posted a fall in third-quarter earnings, were given an ‘underperform’ rating by the analysts.
“We are cautious on CPB on a relative basis, reflecting weak category trends, uncertain returns on emerging market investments and low recent earnings quality. We do not see significant downside risk in absolute terms, but we think the stock could underperform the group until the outlook for FY-10 comes into focus,” they wrote.