Morgan Stanley Thinks Packaged Food Group Will Offer Safe Havens For Investors In 2023

Morgan Stanley analyst Pamela Kaufman has put forth the 2023 outlook for the performance of U.S. food companies.
As consumers face increasing macro pressures, including ongoing inflation, rising interest rates, and rising unemployment, the analyst expects the packaged food group to continue to offer investors a safe haven, particularly in 1H23.
The analyst sees the sector delivering another year of above-average topline growth in 2023, benefiting from consumers shifting their consumption to Food at Home (FAH) as they look for savings.
The carryover benefit of pricing taken in the back half of 2022, and recovering inventory levels/distribution at retail as supply chain conditions improve should help the sector, said the analyst.
The analyst noted that a key risk for the group is increasing demand elasticity from consumers trading down to private label, a dynamic that did not meaningfully play out during 2022 despite pronounced food inflation.
The analyst sees scope for modest margin expansion in 2023 due to moderating commodity prices.
Pamela Kaufman prefers companies that should see sustained strong topline momentum due to their leading share in snacking and BFY (better-for-you) categories with attractive long-term growth rates.
The analyst recommends Mondelez International Inc MDLZ with an Over Weight rating and $75 price target, which has advantaged category/geographic exposure to snacking.
Also Read: Mondelez Divests Gum Business In US, Canada & Europe To Alpenliebe-Owner Perfetti Van Melle For $1.35B
The analyst also sees attractive opportunities in BellRing Brands Inc BRBR with an Over Weight rating and a $28 price target, which should see strong topline growth supported by growth in RTD protein shake category.
Kaufman also upgraded Conagra Brands Inc CAG to Over Weight with a $45 price target as the company should benefit from FAH consumption with its frozen dinners and solid growth in its snacks portfolio.
Related: Conagra Brands Is 'Improving': Why This Analyst Turned Bullish Despite Tailwinds
The analyst also downgraded Hostess Brands Inc TWNK to Equal Weight, removing it as the top pick after a 41% share price appreciation in the last 18 months, outperforming the S&P 500 by 50% over that period.
In 2023, the analyst sees increasing risk of trade- down pressuring branded food volumes and pricing as consumers face greater macro pressures, branded-to-private label price gaps are widening and private label product availability improves with the supply chain.
Private label is gaining the most share in the soup, coffee, refrigerated dough, and cookies categories, the analyst added.
The analyst sees food price disinflation in 2023, but still expect pricing +4.6% in 2023, above pre-pandemic levels of 1.3% on average in 2010-19.
The analyst sees valuation as stretched for select companies, including General Mills Inc GIS and Hershey Co HSY, where there is limited scope for multiple expansions.
Also See: Hershey Earnings Beat Could Make For A Sweet Holiday Season, Analyst Says
The analyst sees valuations as attractive at MDLZ, CAG, and BRBR, which are trading below peers.
Price Action: CAG shares are up 0.68% at $38.39 on the last check Tuesday.
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