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Food stocks: price rises keep inflationary pressure at bay, for now

Panic buying fueled a surge in sales for packaged food companies in the early days of the pandemic. Americans took solace in pantry staples. Demand slowed last year as people returned to the office and restaurants reopened. But due to pressure on cash-strapped consumers, they can now trade in their kale salads for SpaghettiOs once again.

Investors, in turn, have developed an appetite for underperforming food stocks. Shares of leading processed food makers – Kraft Heinz, Campbell Soup, Kellogg and General Mills – are up between 2.5 and 9 percent this year. This is no small feat, given that the S&P 500 is down 14 percent since the start of 2022.

Like other industries, food companies struggle with rising prices for everything from transportation and packaging to labor and raw materials. Still, they have so far proved adept at shifting inflationary pressures onto consumers.

Campbell Soup, whose portfolio also includes Pepperidge Farm Goldfish crackers and Kettle chips, reported a 9 percent increase in organic sales for its fiscal third quarter this week. The increase was entirely attributable to price increases rather than underlying volumes. That helped keep gross margins stable and contributed to: the 18 percent jump in net profit.

Grainmaker Kellogg’s delivered a profit increase of 15 percent last month as it pushed through higher prices and kept costs down. Kraft Heinz and General Mills will report their results in the coming weeks.

On a multiple basis for future earnings, food stocks have traditionally traded at a discount to the S&P 500. But this valuation gap is narrowing as investors seek refuge in defensive stocks. This means that they are starting to get expensive. Their ability to pass on price increases should not be assumed indefinitely.

But compared to the cost of a night out or the sticker shock in the aisles of fresh grocery stores, consumers will likely be willing to sacrifice a bit for the comforts of well-known brands.

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