Food companies are facing a challenging decision as the cost of ingredients continues to rise. They must either pass on the increases to customers and risk selling less food while maintaining margins or absorb the higher costs, sell the same amount of food, but with less profitability.
Leveraging Strong Business Models
A select few food companies have successfully overcome this dilemma, showcasing the strength of their business models. These companies have managed to raise prices without experiencing a significant decline in sales volume or market share. Factors such as strong brand loyalty, limited cheaper alternatives, and low price elasticity have played a role in their success. Additionally, effective cost management has enabled some companies to expand profit margins.
Key Food Companies To Consider
Following a 20% increase in the cost of food over the past three years, investors should pay attention to specific food companies identified by 's. To compile this list, 's examined food companies and restaurants in the S&P 1500 index. The analysis considered companies whose operating margins had widened over the past four reported quarters and were projected to continue doing so based on standardized data from FactSet. Companies with declining sales or net income were excluded from the list.
Among the carefully selected companies across packaged food and beverages, restaurants, and food distributors, there are ten that have consistently demonstrated exceptional resilience during challenging times. While three companies have already reported their fourth-quarter earnings in January, seven others are set to do so this month, and thus, we refer to their third-quarter numbers.
Mondelez International Delivers Strong Performance
One noteworthy company in this group is Mondelez International, the renowned packaged-food titan responsible for Oreo cookies. In its recent fourth-quarter earnings report, Mondelez International showcased impressive growth. Revenue increased by 7.1% compared to the previous year, while adjusted earnings per share surged by almost 24%. The company's operating margins expanded from 9% to 13% year-over-year and are projected to reach 17% in the upcoming quarter, according to analysts polled by FactSet.
Despite rising prices, the demand for Mondelez International's beloved snacks remained robust in 2023. These affordable luxuries have provided a source of comfort and enjoyment for consumers during difficult times.
Mondelez Reports Strong Sales Volume Growth Despite Price Increases
Last year, Mondelez successfully implemented a 13.4% price increase on its products without experiencing a decline in sales volume. In fact, the company's sales volume across all business segments saw a 1.3% gain. Particularly impressive was their performance in Latin America, where food and drink unit sales rose by 3.8% despite a staggering 31% inflation rate.
While sales volume did experience a slight dip in the fourth quarter compared to the previous year, management attributes this to temporary factors such as the Middle East conflict and adjustments made for new acquisitions and product portfolios in the United States. Mondelez remains optimistic, however, expecting volume growth to resume in 2024.
Brinker International Reports Revenue Growth Driven by Higher Prices
Brinker International, the parent company of Chili's and Maggiano's Little Italy restaurant chains, has also released its latest earnings report. The company enjoyed a 5.2% increase in revenue compared to the previous year, primarily attributed to higher prices. Although Brinker strategically increased menu prices to position revenue for a 7.1% growth, it faced challenges such as reduced foot traffic and smaller check sizes, resulting in a 1.9 percentage point reduction.
Despite these challenges, guest traffic showed improvement when compared to the previous quarter, and the operating margin expanded from 4.8% to an impressive 6.1%, according to FactSet data. Brinker International's CEO, Kevin Hochman, credits this success to effective marketing strategies and streamlining operations. Analysts anticipate an even higher margin of 6.4% for the company in the first quarter of 2024.
Promising Stocks in the Food and Beverage Industry
In addition to Mondelez and Brinker International, there are several other stocks worth noting in the food and beverage industry. These include Monster Beverage, Keurig Dr Pepper, Sysco, Brown-Forman, Darden Restaurants, Performance Food, Papa John’s International, and Bloomin’ Brands.
However, it's important to exercise caution in investment decisions as shares of Papa John's, Brown-Forman, and Keurig Dr Pepper have experienced declines of 10% to 20% over the past year. Nevertheless, this also presents an opportunity for these stocks to rebound if their upcoming earnings reports surpass expectations. Of particular interest is Keurig Dr Pepper, currently trading at a forward earnings multiple of 16 compared to its five-year average of 20.