Supply chain issues and labor shortages have led to a significant increase in food prices. However, a steady demand for packaged food products should benefit companies in this space by passing on their rising input costs to consumers. Also, changing consumer tastes and rapid digitalization have been helping food companies to generate rising sales by introducing new products in partnerships with industry leaders.

Investors’ interest in this space is evident from the First Trust Nasdaq Food & Beverage ETF’s (FTXG) 5.1% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) negative returns. The global packaged food market is expected to grow at a 5.2% CAGR to reach $3.41 trillion by 2030. 

Kraft Heinz Co. (KHC) and General Mills, Inc. (GIS) are two prominent players in the packaged food industry. KHC manufactures and markets food and beverage products internationally, including condiments and sauces, cheese and dairy products, meals, meats, refreshment beverages, coffee, and other grocery products. It sells its products through its own sales organizations, independent brokers, agents, distributors, e-commerce platforms, and retailers. GIS manufactures and markets branded consumer foods worldwide. It also supplies branded and unbranded food products to the foodservice and commercial baking industries and manufactures and markets pet food products.

KHC has gained 12.5% year-to-date (YTD) and GIS has lost 0.06% in the same time period.  Which of these stocks is a better pick now? Let’s find out.

Latest Developments

On January 19, 2022, KHC acquired an 85% stake in Germany-based spice-mix and meal-prep brand Just Spices GmbH. Just Spices’ acquisition will leverage KHC’s scale and agility to accelerate the business in the fast-growing taste elevation market beyond the company’s current German base, and its recent market entries in Spain, Austria, and Switzerland, and further strengthen and enhance KHC’s direct-to-consumer operations and go-to-market expansion.

On November 30, 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. In exchange, 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.

Recent Financial Results

KHC’s net sales for its fiscal 2021 fourth quarter ended December 25, 2021, decreased 3.3% year-over-year to $6.71 billion. The company’s gross profit came in at $2.16 billion, indicating a 14.3% year-over-year decline. Its operating loss came in at $20 million versus a $1.55 billion operating income in the prior-year period. KHC’s net loss came in at $255 million for the quarter, compared to a net income of $1.03 billion in the year-ago period. Its adjusted EPS decreased 1.3% year-over-year to $0.79. As of December 25, 2021, the company had $3.45 billion in cash and cash equivalents.

For its fiscal 2022 second quarter ended November 28, 2021, GIS’ net sales increased 6.5% year-over-year to $5.02 billion. The company’s adjusted gross profit came in at $1.62 billion, representing a 3.3% decline from the year-ago period. Its adjusted operating profit came in at $821.30 million, down 5.1% from the prior-year period. GIS’ adjusted net earnings came in at $609.40 million, indicating a 6.4% year-over-year decline. Its adjusted EPS increased 20.4% year-over-year at $2.77. The company had $1.02 billion in cash and cash equivalents as of November 28, 2021.

Past and Expected Financial Performance

KHC’s revenue and EBITDA have declined at CAGRs of 0.3% and 4.6%, respectively, over the past three years. The company’s total assets have decreased at a CAGR of 3.4% over the past three years.

KHC’s EPS is expected to decline 10.2% year-over-year in fiscal 2022, ending December 31, 2022, and rise 1.9% in fiscal 2023. Its revenue is expected to grow 3.8% year-over-year in fiscal 2022 and marginally in fiscal 2023. The company’s EPS is expected to decline at a rate of 1.7% per annum over the next five years.

In comparison, GIS’ revenue and EBITDA have increased at CAGRs of 4.6% and 4.9%, respectively, over the past three years. The company’s total assets have grown at a CAGR of 2.3% over the past three years.

Analysts expect GIS’ EPS to decline marginally from the prior-year period in fiscal 2022, ending June 30, 2022, and rise 4.2% in fiscal 2023. Its revenue is expected to decline 4.7% year-over-year in fiscal 2022 and rise 0.2% in fiscal 2023. Analysts expect the company’s EPS to rise at a 4.6% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, GIS is currently trading at 2.85x, 7.1% higher than KHC’s 2.66x. In terms of forward EV/EBITDA, KHC’s 11.25x compares with GIS’ 14.48x.

Profitability

KHC’s trailing-12-month revenue is almost 1.4 times GIS’. However, GIS is more profitable, with a 34.2% gross profit margin versus KHC’s 33.4%.

Furthermore, GIS’ ROE, ROA and ROTC of 22.7%, 6.5%, and 9.1% compare with KHC’s 2.1%, 3.5%, and 4.5%, respectively.

POWR Ratings

While GIS has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, KHC has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

GIS has a B grade for Quality, consistent with its higher-than-industry profitability ratios. GIS’ 12% trailing-12-month net income margin is 138.7% higher than the 5% industry average. KHC’s C grade for Quality is in sync with its lower-than-industry profitability ratios. KHC has a 3.9% trailing-12-month net income margin, 22.8% lower than the industry average of 5%.

GIS has a B grade for Stability, consistent with its lower volatility compared to the broader markets. It has a 0.50 beta. KHC’s C grade for Stability represents its slighter higher volatility. KHC has a 1.04 beta.

Of the 84 stocks in the B-rated Food Makers industry, GIS is ranked #19, while KHC is ranked #48.

Beyond what we have stated above, our POWR Ratings system has also rated GIS and KHC for Value, Sentiment, Growth, and Momentum. Get all GIS ratings here. Also, click here to see the additional POWR Ratings for KHC.

The Winner

Despite the inflationary pressure, a steady demand for food products should benefit GIS and KHC. 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 Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Food Makers industry.

KHC shares were unchanged in after-hours trading Tuesday. Year-to-date, KHC has gained 12.53%, versus a -9.56% rise in the benchmark S&P 500 index during the same period.

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.

More...