It’s the time of year when new beginnings and ambitious resolutions are all the rage. A common favorite New Year’s resolution is healthy eating. While there may be a ring of seasonal flavour to diet, the trend for healthy eating has been growing steadily over the years, as evidenced by the rise in the number of businesses selling organic and vegan food options and the undeniable revenue growth they have been enjoying.

The consumer preference for healthy and natural sources of nutrition, and chemical-free food products have been driving growth of the global market for organic foods and plant-based alternatives. The global plant-based meat market, valued at US$4.3 billion in 2020, is projected to nearly double by 2025, growing nearly 15% annually from 2020 to 2025. A similarly dramatic rise is projected for the global organic food and beverage market, set to skyrocket from US$160 billion in 2020 to about US$400 billion in 2027.

As the interest in healthy eating intensifies, these companies are spending money on marketing and product innovation to be consistent with the culinary zeitgeist. Long-term investors looking for health-food play may want to look at these companies that are well positioned to benefit from secular trends in meals and snack patterns that will continue well past the pandemic-led rush to organic products.

Beyond Meat Inc
  Ticker BYND
  Current yield:
  Forward P/E: 454.55
  Price US$119.80
  Fair value: US$146
  Value 19% discount
  Moat None
  Moat Trend Positive
  Star rating ****
Data as of January 07, 2021

A leading provider of plant-based meats, or PBMs, Beyond Meat (BYND) sells meatless burgers (64% of 2019 sales), sausage (23%), ground beef (13%), and chicken. The products are widely available in the U.S. and Canada, and in 83 additional countries. International revenue represented 33% of 2019 sales.

Unlike other vegetarian products, Beyond Meat’s products look and taste like meat and are targeted to omnivores and vegetarians alike. Beyond benefits from the glowing prospects of the global PBM market, projected by Morningstar to grow from US$12 billion in 2019 to US$74 billion by 2029 (a 19% CAGR). “We model Beyond’s market share increasing from 2.5% in 2019 to nearly 9% in 2029, as PBMs gain a larger share of the overall meat category, and as Beyond’s brand continues to win with consumers, given its strong performance in taste tests and ongoing R&D investments,” says a Morningstar equity report.

No-moat Beyond uses GMO-free products which provides an edge over rivals that use GMOs in their offerings. “This is an important distinction because GMOs are banned in Europe, and according to a survey conducted by the International Food Information Council, 46% of American consumers avoid GMOs, which have been linked with various diseases,” says Morningstar equity analyst, Rebecca Scheuneman, who recently lowered the stock’s fair value from US$156 to US$146, prompted by weaker sales and additional expenses during the pandemic.

General Mills Inc
  Ticker GIS
  Current yield: 3.48%
  Forward P/E: 15.75
  Price US$58.05
  Fair value: US$57
  Value Fairly valued
  Moat Narrow
  Moat Trend Negative
  Star rating ***
Data as of January 07, 2021

Leading global packaged food company, General Mills (GIS) produces snacks, cereal, convenient meals, yogurt, dough, baking mixes, pet food, and ice cream. Its largest brands include Nature Valley, Cheerios, Old El Paso, Yoplait, Pillsbury, Betty Crocker, BLUE, and Haagen-Dazs. The firm generated about three-quarters of its revenue from the U.S. and the rest from Canada, Europe, Australia, Asia, and Latin America.

“As at-home food consumption remains elevated during the pandemic, consumers are finding favour with offerings like those in General Mills’ portfolio, as shown by increases in household penetration and repeat purchase rates in most categories,” says a Morningstar equity report, adding that “even with fluctuations in consumer health preferences, General Mills will report outsize returns for the next 10 years.”

The firm’s narrow moat stems form its preferred status with retailers, brand equity, and cost edge. Owing to its dominance in cereal, dessert mixes, refrigerated dough, and natural pet food aisles, the firm gained or maintained share in 8 of its 10 largest U.S. food categories and its brands continue to command price premiums. “These strong brands have resulted in solid relationships with retail partners and a scale-based cost advantage,” notes Scheuneman, recently upped the stock’s fair value from US$53 to US$57.

Sprouts Farmers Market Inc
  Ticker SFM
  Current yield:
  Forward P/E: 11.34
  Price US$19.58
  Fair value: US$24.50
  Value 17% discount
  Moat None
  Moat Trend Negative
  Star rating ****
Data as of January 07, 2021

American specialty grocery store, Sprouts Farmers Market (SFM) sells health-oriented assortment of natural and organic products with special focus on produce (around 23% of sales in fiscal 2019). Private-label products accounted for about 14% of sales for the same period. The company’s operations are in the United States, with its stores largely concentrated in the southern half of the country.

“Sprouts has capitalized on a natural, health-oriented positioning aligned with culinary trends, but we believe it faces a competitive onslaught as conventional grocers, mass merchandisers, hard discounters, and online sellers target the same themes,” says a Morningstar equity report. Sprouts’ size denies it a durable cost advantage, a key metric for measuring competitiveness.

On a positive note, the firm’s new leadership started revitalization work in early 2020, focused on stabilizing shrinking operating margins (6.8% in 2014 versus 3.9% in 2019) and optimizing an inefficient expansion strategy. It must be pointed out, though, that while Sprouts’ fresh, natural, and health-oriented positioning is consistent with recent consumer trends, the firm lacks scale enjoyed by its bigger rivals. “We anticipate Sprouts will face a significant challenge from firms that can bring their scale to bear in reducing costs, encroaching upon the chain’s health- and value-oriented positioning,” cautions Morningstar equity analyst, Zain Akbari, who pegs the stock’s fair value at US$24.5.

 



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