Deepening supply chain issues and high energy and transportation costs have led to a significant increase in food prices lately. However, strong demand for packaged food products should help companies overcome rising input costs by passing them on to consumers. Also, changing consumer tastes and rapid digitalization have been helping food companies to generate good sales by introducing new products in collaboration with leading industry participants.
Investors’ interest in this consumer defensive industry is evident from the First Trust Nasdaq Food & Beverage ETF’s (FTXG) 10.6% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 4.3% returns. The global packaged food market is expected to grow at a 6.3% CAGR to reach $4.26 trillion by 2026.
General Mills, Inc. (GIS) and Conagra Brands, Inc. (CAG) are two prominent players in the packaged food industry. GIS manufactures and markets branded consumer foods, including snacks, ready-to-eat cereal, convenient meals, yogurt, wholesome natural pet food, super-premium ice cream, baking mixes and ingredients, and refrigerated and frozen dough. It also supplies branded and unbranded food products to the food service and commercial baking industries. CAG manufactures and markets packaged foods for retail consumers, restaurants, and institutions. The company offers meals, entrees, condiments, sides, snacks, specialty potatoes, milled grain ingredients, dehydrated vegetables and seasonings, and blends and flavors.
While CAG gained 2.75% year-to-date, GIS jumped 4.5%. Which of these stocks is a better pick now? Let’s find out.
Latest Developments
On November 30, 2021, GIS sold its 51% controlling interest in its franchise yogurt brand Yoplait’s operations in Europe to its other parent company, Sodiaal S.A., France’s leading dairy cooperative. GIS acquired full ownership of Yoplait’s business in Canada from Sodiaal. With this divestiture, GIS will now operate with a reduced royalty rate for the use of the Yoplait and Liberté brands in the U.S. and Canada. Also, this divestiture advances GIS’ Accelerate strategy to drive long-term, superior shareholder returns.
On April 12, 2022, CAG’s Evol brand became the first to introduce eight Carbonfree Certified Carbon Neutral single-serve frozen meals produced in a TRUE certified Zero Waste facility. This reflects Evol’s commitment to reducing their products' carbon footprint over their full lifecycle – from ingredient sourcing and packaging to product manufacturing, distribution, and consumer use and end of life. This should help CAG brands gain wide market reach in the coming months.
Recent Financial Results
GIS’ total net sales for its fiscal 2022 third quarter ended February 27, 2022, increased marginally year-over-year to $4.54 billion. The company’s adjusted gross profit came in at $1.43 billion for the quarter, down 4.4% from the prior-year period. Its adjusted operating income came in at $676.50 million, indicating a 5.5% decline from the prior-year period. While its adjusted net earnings increased 1.1% year-over-year to $513.90 million, its adjusted EPS grew 2.4% to $0.84. As of February 27, 2022, the company had $844.40 million in cash and cash equivalents.
For its fiscal 2022 third quarter ended February 27, 2022, CAG’s net sales increased 5.2% year-over-year to $2.91 billion. The company’s adjusted gross profit came in at $700.90 million, down 7.9% from the prior-year period. Its adjusted operating profit came in at $399.50 million, indicating a 9.9% decline from the year-ago period. CAG’s adjusted net income declined 3.1% year-over-year to $278.70 million. Its adjusted EPS came in at $0.58, indicating a 1.7% year-over-year decline. The company had $79.70 million in cash and cash equivalents as of February 27, 2022.
Past and Expected Financial Performance
Over the past three years, GIS’ net income, EPS, and total assets have increased at CAGRs of 14.4%, 13.6%, and 0.9%, respectively.
GIS’ EPS is expected to grow 1.1% year-over-year in fiscal 2022, ending May 31, 2022, and 3.4% in fiscal 2022. Its revenue is expected to grow 4.2% in fiscal 2022 and 1.2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 4.3% rate per annum over the next five years.
CAG’s net income and EPS have increased at CAGRs of 18.7% and 13.4%, respectively, over the past three years. Its total assets declined at a CAGR of 0.3% over the past three years.
Analysts expect CAG’s EPS to decline 9.8% year-over-year in fiscal 2022, ending May 31, 2022, and rise 8% in fiscal 2023. Its revenue is expected to grow 3.1% year-over-year in fiscal 2022 and 2.9% in fiscal 2023. Analysts expect the company’s EPS to grow at a 0.9% rate per annum over the next five years.
Valuation
In terms of forward EV/Sales, GIS is currently trading at 2.87x, 27.6% higher than CAG’s 2.25x. In terms of forward EV/EBITDA, CAG’s 12.15x compares with GIS’ 14.54x.
Profitability
GIS’ trailing-12-month revenue is almost 1.6 times CAG’s. GIS is also more profitable, with a 33.4% gross profit margin versus CAG’s 25.6%.
Furthermore, GIS’ ROE, ROA, and ROTC of 23.3%, 6.3%, and 8.7% compare with CAG’s 12.1%, 4.8%, and 6%, respectively.
POWR Ratings
While GIS has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CAG has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both GIS and CAG have a C grade for Value, reflecting their slightly higher-than-industry valuation ratios. GIS’ 3.21x non-GAAP forward PEG is 21.5% higher than the 2.64x industry average. CAG has a 3.39x non-GAAP forward PEG, 28.1% higher than the industry average of 2.64x.
GIS has a B grade for Quality, consistent with its higher-than-industry profitability ratios. GIS’ trailing-12-month ROE of 24.6% is 86.8% higher than the industry average of 13.2%. CAG’s C grade for Quality is in sync with its lower profitability ratios. CAG has a 12.2% trailing-12-month ROE, 7.4% lower than the industry average of 13.2%.
Of the 86 stocks in the B-rated Food Makers industry, GIS is ranked #17, while CAG is ranked #54.
Beyond what we have stated above, our POWR Ratings system has also rated GIS and CAG for Stability, Momentum, Sentiment, and Growth. Get all GIS ratings here. Also, click here to see the additional POWR Ratings for CAG.
The Winner
Despite high inflationary pressure, a steady demand for packaged food products should benefit GIS and CAG in the coming months. However, higher profitability makes GIS a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Food Makers industry.
GIS shares were trading at $70.68 per share on Wednesday afternoon, up $0.25 (+0.35%). Year-to-date, GIS has gained 6.46%, versus a -6.37% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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