KANSAS CITY — Anyone monitoring the grain-based foods sector’s financial results and listening to the evolving narratives of industry executives at publicly-traded companies knows the past year was difficult for the industry. For many of the sector’s companies, the operating environment failed to develop in 2023 in ways conducive to sales and earnings growth chief executive officers had guided investors to anticipate. With the trimming of guidance at many companies, repeatedly in certain cases, the poor performance of grain-based foods share prices should not have been surprising. The share price weakness still managed to deliver a jolt.
Declines in Milling & Baking News’ Grain-Based Foods (GBF) Share Index have been a rarity over the last 15 years. Before 2023, the index was higher for 13 of the previous 14 years. The period included eight consecutive years of gains after a 22% drop in 2008.
Josh Sosland, editor of Milling & Baking News Source: Sosland Publishing Co.
Giving the 2023 performance an especially negative look was not the absolute decline of 6.5%, only a moderate setback. It was the underperformance of the GBF index relative to broader market indexes, the worst in 20 years. Compared to the S&P 500 index, grain-based foods shares lagged by 30.7 percentage points. Relative to the NASDAQ index, the deficit was even greater — 49.5 percentage points.
Some comfort may be taken in the fact the S&P 500’s surge in 2023 was driven by a relatively small number of companies, and 72% of the stocks in the index failed to achieve the benchmark’s gain of 24%. Still, that statistic implies that more than one in four companies in the S&P 500 beat the index last year. Among the GBF shares, not a single company beat the S&P 500 last year, or even came close. The top performing stock in the index gained 12%, only half what the overall S&P 500 gained in 2023.
Despite the year’s many negatives, perspective on what transpired last year paints a less dire picture and implies positive notes for what to expect in 2024. To begin, the sharp underperformance of grain-based foods shares last year represented a reversal from the year before when the GBF index beat the S&P 500 by about 27 points. Food companies are not impervious to market volatility. Targeting low single-digit sales growth each year and mid-single digit operating profit growth, the food sector is not positioned to generate double-digit share price gains year after year.
Instead of an indictment on the grain-based foods industry and its prospects, the underperformance last year for the most part has been characterized as a sector rotation within the investment community. Just as rising interest rates prompted investors to seek shelter in the safety of food stocks in 2022, optimism that interest rates had or had nearly peaked triggered a shift by investors to “growthier” tech-oriented companies.
Those looking for hopeful signs for 2024 need look no further than the dynamism evident across the grain-based foods industry. In the bread segment for example, the success of numerous products currently trending positively was apparent in capital investments/acquisitions announced over the last couple years. Examples include a new plant to be built by King’s Hawaiian in Indiana to deal with what the company called capacity constraints; the expansion of the J.M. Smucker Co. Longmont, Colo., Uncrustables plant; and Bimbo’s acquisition in late 2022 of St Pierre Group, the baker of brioche-style products.
Also cause for optimism were two major transactions completed over the past year, aimed at accelerating growth — the spinoff of Kellogg Co. into Kellanova and WK Kellogg Co and the Smucker acquisition of Hostess Brands. Meanwhile, food, beverage and processing companies go into 2024 with far more attractive relative valuation than was the case in January 2023. Despite last year’s difficulties, there is cause for optimism in the new year.
