Food Trends Every Investor Needs To See

In a recent report, analysts at RBC Capital Markets discussed trends in the food sector. After meeting with investors over the past several weeks, analysts see several themes developing in the space.

M&A Driving Sector

Headlines in the food sector lately have been dominated by Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B) and 3G Capital Inc. According to the report, the focus on mergers and acquisitions (M&A) can be both exciting and frustrating for investors.

Analysts believe that the wave of M&A activity is far from over, as they predict that the Kraft Foods Group Inc KRFT/H.J. Heinz Company HNZ merger leaves the new Kraft Heinz entity well positioned to make additional acquisitions as soon as late 2016.

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In addition, analysts believe that Kraft Heinz may soon be looking to shed non-core brands. They see Outperform-rated Pinnacle Foods Inc PF and B&G Foods, Inc. BGS as potential buyers in this scenario.

Challenges Ahead

Investors recognize that high valuations and weak revenue growth opportunities will likely continue to weigh on large-cap food stocks such as Outperform-rated Mondelez International Inc MDLZ. However, earnings could be boosted by increasing advertisement efficiency, lower energy-related food costs and relatively low currency drag.

'Trade-Up Consumer' Shift

The growing trend toward healthy food has shifted consumers away from traditional weight-management brands, such as The Coca-Cola Co KO's Diet Coke, Nestle's Lean Cuisine and Kellogg Company K's Special K.

The modern health-conscious consumer is choosing smaller brands and more organic food. According to analysts, food consumers are "listening less to TV and more to friends, trusted retailers and the Internet/social media." Analysts point out that many smaller, lower-margin brands have been gaining share from the larger brands in the space.