Investing.com – The U.S. food sector appears to be very inexpensive compared to the broader market, raising questions among investors about whether this is a good entry opportunity, Bernstein analysts said in a note.
The sector, which underperformed the market by more than 30% in both 2023 and 2024, is trading at its lowest levels in more than two decades. This assessment comes even though the sector's trading numbers are in line with its 20-year average on an EV/EBITDA basis, according to Bernstein's analysis.
But despite the attractive valuation, the investment bank is warning investors of potential headwinds that could leave the sector in a value trap. Taking GLP-1 medications and staying away from highly processed foods are key concerns.
However, analysts say the silver lining is emerging in the form of improved consumer sentiment among lower-income households, which could reduce the “value-seeking behaviors” that have negatively impacted companies in 2024.
Bernstein highlights the importance of monitoring the FDA deficiency listings in 2025, as GLP-1 medication continues to impact volumes. Pill versions of these drugs are expected to hit the market in 2026.
External studies indicate that GLP-1 adoption significantly impacts the consumption of processed foods, which may particularly impact sales of sweet and salty snacks, as well as French fries and burgers in the quick service restaurant (QSR) channel.
Bernstein notes that regulatory challenges may also arise, especially if Mr. RFK Jr. is appointed to a position where he can influence food policy. Its potential policies could include banning certain food additives or restricting a wider range of additives already banned in the EU.
“On the face of it, companies can reformulate their products fairly easily and at relatively low cost to respond to such regulation,” analysts led by Alexia Howard said.
“But it is the impact of greater media focus on the links between healthy food choices and chronic health conditions in the minds of consumers that could have a greater impact on eating trends, as happened in 2012 around the time of GMOs.” They added that the California labeling bill.
Besides these key points, analysts also point to rising costs for commodities such as cocoa and coffee, while other input costs remain relatively stable. To support volumes, companies may need to increase promotional activities.
Regarding mergers and acquisitions (M&A) activity in the sector, analysts expect it to continue throughout the year, with Simply Good Foods (NASDAQ:) identified as a potential takeover target. Activist engagement can also lead to broader consolidation among larger players in the industry.
The research firm concludes with its top picks in the sector, with Mondelez (NASDAQ:), McCormick (NYSE:), Simply Good Foods, and Hain Celestial (NASDAQ:) favored for long positions.
