Milling & Baking News - January 24, 2023 - 22

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Will food company shares do well
in '23? Analyst opinions vary
subjected to such pressure, " he said.
While food companies paid a price
in terms of volume, the losses in unit
sales were " maybe not as much as you'd
expect, " he said.
" Elasticity has been much better than
expected, " he said. " I've been surprised by
the degree to which companies have not
been better rewarded for the lack of elasticity,
the lack of volume decreases. "
While the overall stock market " performed
horribly and no one wanted to talk
stocks in 2022, it was a good year for the
packaged foods sector, " Mr. Pinheiro said.
" Over two years packaged foods were
up 18%, " he continued. " It sure beat the
market by any measure. The question is
why did it do well? Going to 2023, it will be
the most defensive place to be. "
Despite a " really negative year for
equity holders across the board, " 2022
for food investors " was pretty good, " Mr.
Moskow said.
" I think that had to do with sector rotation,
shifting into safer haven sectors, "
he said. " Higher interest rates negatively
affected discretionary spending. Consumers
spent on essentials. "
Mr. Moskow said executives from
" As the consumer gets
pinched, pricing levers
start to disappear. We
still have cost inflation
- wage inflation is not
over. "
- Mitchell B. Pinheiro,
Sturdivant and Co.
Walmart early in 2022 identified this shift
in consumer spending patterns with the
high prices of food and energy cutting
into the ability of many buyers to make
discretionary purchases. Certain larger
retailers were " caught flatfooted " because
they spent excessively on inventory of
non-essential items, demand for which
initially had been strong as the pandemic
waned, Mr. Moskow said.
" The biggest surprise for me - consumer
resilience in the food aisle turned
out to be stronger than I expected, " he
said. " With food inflation of 15% to 16%,
volume declined less than expected. You
had strong top-line results, accelerating
through the year. At the end of the year,
favorability from pricing actions finally
was catching up with cost inflation they
were experiencing, more than catching
up because market commodities began
falling. "
A question hanging over the food sector
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MILLING & BAKING NEWS
going into 2023 is whether and to what
extent food company profit margins will
continue to recover. Top management from
food companies have said wider margins
will be pursued and are justified because
of profitability that was lost during an
extended period in which cost pressure
squeezed margins, Mr. Moskow said.
" Investors are not sure about whether
margins will recover, or whether elasticity
of demand will increase, " Mr. Moskow
said. He noted that during the second half
of 2022 sequential softening emerged in
away-from-home eating, suggesting consumers
are becoming more mindful of
what they spend on food and beverage.
For his part, Mr. Moskow is upbeat for
the near term.
" I believe the positive cycle will be
robust for margin expansion, " he said.
" The next couple quarters will show positive
trends. From a full-year perspective,
I'm not totally sold on the idea margins
will get back to pre-pandemic levels.
Grocers sound increasingly frustrated
by the amount of pricing that has been
taken. Kroger has said some increases
are probably not justified. I think
demand for private label will accelerate.
We already are seeing it. Big brands tend
to lose market share during periods of
severe inflation. "
Potentially adding pressure on profit
margins later in the year will be the
effects of continued easing of supply chain
disruptions in 2023.
" When there is more availability, there
tends to be more promotions, " Mr. Moskow
said. " Industry hopes promotions will be
more rational. I think old habits die hard.
As pressure from private label increases,
retailers will weaken in their resolve. "
Mr. Pinheiro was even more guarded
about the outlook for food shares, cautioning
that the appeal of the sector to investors
seeking dividend yield may be waning.
Average dividend yields for the sector
have declined to about 2.7% from 3%, he
said. Meanwhile, an interest rate of 4% on
two-year treasury notes is available.
" With the treasuries, investors don't
need to worry about volatility in the
staples as pricing leverage diminishes, "
Mr. Pinheiro said. " As the consumer gets
pinched, pricing levers start to disappear.
We still have cost inflation - wage
inflation is not over. There will still be
pressure on the cost side of the equation
in 2023. I'm not very enthused about the
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