NEW YORK — Stating its view that larger food companies and investors are most likely underestimating the long-term structural impact that the coronavirus (COVID-19) pandemic will have on at-home food consumption, Credit Suisse on April 16 said it is raising its sales estimates above consensus for 10 of the 11 packaged food companies it covers. The investment banking firm also said it is raising its earnings-per-share estimates above consensus for more than half of the packaged food companies it covers.

“Big Food retail sales grew 53% on average in March and outpaced the industry for the first time in years, but the market assumes that almost all of it reverses in 2021,” Robert Moskow, research analyst, wrote in the report. “As evidence, US food P/E valuation multiples have stayed in-line with the 10-year average, and consensus estimates for 2021 have not moved materially higher.”

Moskow said Credit Suisse has identified four structural factors primarily responsible for the estimate revisions.

First, Credit Suisse thinks that once shelter-in-place orders are lifted consumers will continue to spend more time at home and avoid working at offices. They also are expected to limit traveling and attendance at public gatherings.

“This will create more at-home eating occasions for everything from Special K cereal to Folgers coffee,” Moskow wrote.

Second, consumers likely will try to save money during an economic recession by cooking for themselves, he said.

Mr. Moskow said a third factor behind the estimate revisions involves the role of startups. As the dust settles, Mr. Moskow said Credit Suisse thinks large food companies are likely to face reduced competition from smaller startups.

Finally, repeat rates for branded products are likely to increase due to recent investments to improve product quality, he said.

Although Credit Suisse expects sales at large food companies to remain strong, Moskow noted that a distrust of the large industry players runs deep.

“Lack of reinvestment and rapid changes in consumer preferences caused these companies to miss their sales forecasts and their stocks to largely tread water for the past five years,” he wrote. “As a result, we see room for upside to valuation multiples as investors and the corporates gain confidence that sales growth can revise higher in a material way. Recent optimism about reaching the peak of COVID-19 and reopening the economy is actually working against these stocks because it suggests a quicker reversion back to away-from-home food consumption.”

Diving deeper into an analysis of individual companies, Moskow said Credit Suisse is “incrementally more constructive” on Minneapolis-based General Mills, Inc. in the near term. The investment banking firm raised its fiscal 2021 EPS estimate 3% above the consensus, saying it thinks guidance for the fiscal fourth quarter “is overly conservative and the company’s recent tracking data was highly impressive.”

“US Retail sales growth of 62% in the past four weeks far exceeded the industry average of 39% with market share gains in cereal, snack bars, pet food and refrigerated dough indicating that marketing execution is improving,” Moskow wrote. “The stock has outperformed in past recessions because it has above-peer cash flow generation and a portfolio of dependable brands.”

Meanwhile, Moskow said Credit Suisse has raised its outlook on TreeHouse Foods, Inc. to “outperform,” noting the Oak Brook, Ill.-based company offers the most upside in the group of large food companies that the agency covers.

“Despite TreeHouse’s leadership in the high-growth private label industry, the company’s operational volatility has bruised its reputation with investors and customers alike,” Moskow said. “Now, with private label sales growing 42% and customer orders surprising to the upside, TreeHouse has a unique opportunity to improve its reputation with investors and customers alike. If TreeHouse maintains a high level of customer service during the pandemic, sales will revise higher and customers will trust the company to help them expand their private label programs as they prepare for an economic recession.  Because of its strong cash flow, we estimate that this stock can get to the mid-$60s just from de-leveraging alone.”

On the other side of the coin, Kraft Heinz Co., Pittsburgh, and B&G Foods, Inc., Parsippany, NJ, face hurdles.

“Retail sales for both of these companies grew at an above-peer pace over the past four weeks, and Kraft Heinz pre-announced a positive 1Q,” Moskow said. “However, even after boosting our sales and cash flow forecasts, we expect these companies’ debt levels to remain high because they allocate so much of their cash flow to dividend payments. As a result, unlike TreeHouse, it is difficult to make a bull case scenario for these stocks based on the benefits of de-leveraging. Also, we think Kraft Heinz’s brands in commodity categories (like cheese, meat and nuts) to continue to lose market share to private label as consumers try to save money.”

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