Why Conagra Brands and Albertsons Could Be havens

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The stock market has been a scary place this year, but grocery stocks may provide a haven.

The S&P 500 is in a bear market, dropping 23% from its early January all-time high because of sky-high inflation.

That has prompted the Federal Reserve to lift short-term interest to lower economic demand. And a surge in long-dated bond yields makes future profits less valuable, one factor causing valuations to fall. 

But grocery stocks often fare better in rough times because they sell essential items, so their sales and earnings are much more stable—even when consumers pull back on spending.

Grocers can often lift prices without destroying consumer demand, as they look to offset surging costs and prevent their profit margins from falling too much.

That was seen in the most recent consumer price index reading, which revealed that food-at-home prices have been gaining more than 10% year-over-year, above the gains in the overall CPI.

Additionally, grocers’ valuations don’t decline as much when long-dated bond yields rise because these companies aren’t valued on the basis that they will produce a bulk of their profits so far into the future. They’re bringing in big profits now. 

For all of those reasons, “our view is that these guys [grocers] are likely to hold up a little bit better than most [stocks],” says Joe Feldman, analyst at Telsey Advisory Group. 

Conagra Brands

(ticker: CAG) is one of the best examples. The stock is down about 8% for the year. It’s about flat since May 20, the start of a wild ride for the S&P 500, which is now down a few percentage points from that date.

Partly driving Conagra’s relatively strong share price performance is product price increases.

The company said on its April earnings call that it has been lifting prices to offset higher costs. To be sure, analysts expect the company’s gross margin to still fall to 25.5% for this calendar year from 26.4% in 2021, according to FactSet.

But that margin is expected to move back to 26% next year, as CEO Sean Connolly said that more price increases are coming in the quarter ended in August—and that the recent price hikes haven’t yet caused customers to significantly reduce the number of items they buy. 

The other factor supporting the stock is its stable valuation. The stock’s forward price/earnings multiple has fallen about 8% this year to around 12 times. That is not so bad, considering that the S&P 500’s aggregate forward earnings multiple has dropped more than 25% to just over 15 times. 

Albertsons Companies

(ACI) is in the same boat as Conagra. Its stock is down just 9% for the year and is about flat since May 20. 

The grocery store owner has also been able to keep margins in shape through higher pricing. Analysts expect the gross margin to drop to 28.6% this year from 29% in 2021.

That is not bad at all, considering that Target (TGT), which sells many discretionary items that consumers are no longer willing to pay such high prices for, is expected to see its gross margin drop 3 percentage points this year to 26%.

Albertson’s “has been effective in managing inflation,” writes

Morgan Stanley

analyst Simeon Gutman. 

Albertson’s valuation, too, has fallen by less than the broader market’s. Its earnings multiple is down only 20% to just under 14 times, not as large as the S&P 500’s multiple decline. 

A lot of stocks have fallen this year—and that could continue. But at least the grocery stocks probably won’t get hit nearly as hard. 

Write to Jacob Sonenshine at [email protected]