Food Companies Navigate Rising Ingredient Costs

Food companies face an important decision when the cost of ingredients rises: pass on the increases to customers and protect their margins, risking a decline in sales, or absorb the higher costs and maintain sales but with less profitability.

However, there are a select few that have successfully managed to raise prices without experiencing a significant impact on sales volume or market share. This showcases the strength of their business models. Factors such as strong brand loyalty, limited cheaper alternatives, and low price elasticity in demand contribute to their success. Additionally, effective cost management has enabled some companies to even expand their profit margins.

Investors should consider these resilient food companies following a 20% increase in the cost of food over the past three years, both for at-home consumption and dining out.

To identify these companies, we evaluated food companies and restaurants in the S&P 1500 index. We focused on those whose operating margins have widened over the past four reported quarters and are projected to continue doing so based on standardized data from FactSet. Any companies that experienced declines in sales or net income were excluded from our analysis.

After careful evaluation, we identified 10 companies spanning packaged food and beverages, restaurants, and food distributors that have demonstrated a remarkable ability to withstand challenging times. While three of these companies have already reported their fourth-quarter earnings in January, the remaining seven are scheduled to announce their results later this month. For the purpose of our analysis, we examined their third-quarter numbers.

One notable company is Mondelez International, known for producing iconic snacks like Oreo cookies. In its recently reported fourth-quarter earnings, Mondelez International experienced a 7.1% increase in revenue compared to the previous year. Moreover, adjusted earnings per share rose by almost 24%. The company’s operating margins expanded from 9% to 13% year-over-year and analysts predict further growth to 17% in the upcoming quarter, as reported by FactSet.

Despite the rise in prices throughout 2023, consumer demand for these beloved snacks remained resilient. As people sought affordable indulgences during challenging times, Mondelez International was able to maintain its strong performance.

These 10 food companies have demonstrated their ability to navigate rising ingredient costs and maintain their profitability. Investors should closely monitor their performance as they continue to weather the challenges of the ever-changing food industry.

Mondelez Sees Sales Volume Hold Steady Despite Price Increases

Mondelez, a leading food and beverage company, successfully raised prices of its products by 13.4% over the past year without experiencing a decline in sales volume. In fact, the company’s sales volume across all business segments recorded a 1.3% gain. Particularly notable was the performance in Latin America, where units of food and drinks sold increased by 3.8% despite a high inflation rate of 31%.

While sales volume slipped slightly in the fourth quarter compared to the previous year, management attributed this to temporary issues such as the ongoing war in the Middle East and adjustments related to new acquisitions and product portfolios in the U.S. The company, however, remains optimistic and expects volume growth to resume in 2024.

Brinker International Reports Positive Earnings Growth

Brinker International, the parent company of popular restaurant chains Chili’s and Maggiano’s Little Italy, recently announced its earnings report. Revenue for the company grew by 5.2% compared to the previous year, driven by higher prices. Although higher prices positioned revenue to rise by 7.1%, foot traffic and check sizes were slightly smaller compared to the previous year, resulting in a 1.9 percentage point reduction in overall gain.

Despite these challenges, guest traffic showed improvement compared to the previous quarter, and operating margin expanded from 4.8% to 6.1%. CEO Kevin Hochman credits this increase to effective marketing strategies and efforts aimed at streamlining operations. Analysts predict an even higher margin of 6.4% for the restaurant operator in the first quarter of 2024.

Stocks to Watch: Monster Beverage, Keurig Dr Pepper, Sysco, Brown-Forman, Darden Restaurants, Performance Food, Papa John’s International, and Bloomin’ Brands

Several stocks have caught the attention of investors, including Monster Beverage, Keurig Dr Pepper, Sysco, Brown-Forman, Darden Restaurants, Performance Food, Papa John’s International, and Bloomin’ Brands.

However, three stocks within this group—Papa John’s, Brown-Forman, and Keurig Dr Pepper—have experienced a decline in stock prices ranging from 10% to 20% over the past year. As a result, caution should be exercised when considering investments in these companies.

Nonetheless, this also presents an opportunity for potential recovery if the upcoming earnings reports exceed expectations. Keurig Dr Pepper, in particular, is currently trading at 16 times forward earnings, which is lower than its five-year average of 20 times.

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