We recently compiled a list of the 7 Best Organic Food and Farming Stocks to Buy. In this article, we are going to take a look at where Kellanova (NYSE:K) stands against the other organic food and farming stocks.
The farming and organic food industry is essential in meeting global food demand while catering to the growing preference for healthier and sustainable options. Despite challenges like fluctuating costs and climate change, the sector benefits from trends such as increased organic food consumption and alternative proteins.
Sector Performance
The broader market had a strong performance in 2024, largely driven by technology stocks in the first half, resulting in a roughly 16% (year-to-date) YTD increase. However, future performance remains uncertain due to ongoing market volatility.
In 2022, inflationary pressures in the U.S. reached a peak, fueled by rising input costs for commodities, transportation, and labor. Since then, inflation has gradually decreased, providing relief for businesses across sectors. Inflation continues to ease as the annual inflation rate slowed for a fifth consecutive month to 2.5% in August 2024, the lowest since February 2021. This has led to lower feed costs, improving margins in the agriculture industry. The sector is also experiencing stable poultry production, slight gains in pork, and challenges in herd recovery due to constraints in the beef industry, resulting in higher retail beef prices.
While alternative proteins remain an essential, yet small component in meeting global demand, their sales have recently contracted. Despite this setback, reduced access to capital infusions has benefited the sector by filtering out weaker products, resulting in stronger business plans with a clear focus on profitability.
Overall, food and farming companies are still grappling with the lingering effects of high inflation, particularly elevated commodity prices, as the ‘Farm Products’ sector has underperformed with a 7.80% YTD decline. Although consumer spending has remained stable, households have shifted toward a “value-driven” mindset, prioritizing affordability in response to the rising cost of living.
Agriculture Market
According to the Business Research Company Report, the agricultural sector is poised for robust expansion in the coming years. Projections indicate the market will reach $19,286.79 billion by 2028, growing at a compound annual growth rate (CAGR) of 7.7%, according to The Business Research Company.
Even the agricultural sector hasn’t been able to escape the impact of the ongoing AI revolution as farmers in the US are increasingly adopting AI to address key challenges like labor shortages and climate unpredictability. Technologies such as drones, self-driving tractors, and AI-driven crop management tools are helping farmers maintain productivity and profitability in an industry facing workforce declines and increasing costs. These innovations not only improve productivity but also help reduce expenses by optimizing resource use and enhancing efficiency across farming operations. AI is poised to transform agriculture, helping farmers “do more with less” and meeting the world’s growing food needs.
Organic Food Market
Organic food sales in the United States in 2022 broke through the $60 billion mark for the first time, hitting another high-level mark for the resilient organic sector. Total organic sales – including organic non-food products – were a record $67.6 billion, according to the 2023 Survey by the Organic Trade Association.
However, this market is also facing challenges, such as the shorter shelf life of organic products due to the absence of preservatives. According to Lending Tree, inflation last year had a greater impact on organic food prices compared to conventional products. In that period, organic fruit and vegetable prices rose by 13.1%, while conventional counterparts saw a 9.9% increase. Similarly, organic chicken prices surged by 19.5%, compared to a 5.9% rise in conventional chicken prices.
The outlook for the organic food industry remains strong, fueled by rising consumer interest in sustainability and health. Organic sales have more than doubled in the past decade, surpassing $50 billion, with food sales reaching this mark in 2019. Despite challenges like economic fluctuations and supply chain disruptions, the industry’s focus on sustainability positions it for continued growth.
Methodology:
For this list, we scanned Insider Monkey’s database of Q2 2024 and selected companies involved in the organic food and farming industries, covering areas including but not limited to processing and distribution of agricultural, industrial, feed, and organic food products. From that group, we picked 7 companies with strong balance sheets and solid financials and ranked them in ascending order of hedge funds having stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A stack of grocery bags filled with ready-to-eat cereals, frozen waffles, and savory snacks.
Kellanova (NYSE:K)
Number of Hedge Fund Holders: 45
Next on the list is Kellanova (NYSE:K). With a legacy of over 100 years, it boasts iconic brands like Pringles, Cheez-It, Pop-Tarts, and RXBAR. It also includes Kellogg’s (international), Eggo, and MorningStar Farms. In 2023, Kellanova achieved net sales of over $13 billion and operates in 180 markets with around 23,000 employees. One of its brands, Pure Organic, offers organic, gluten-free, non-GMO Project Verified, and vegan snacks.
In Q2 2024, Kellanova (NYSE:K) reported net sales of $3,192 million, reflecting a 4% organic growth. Adjusted operating profit surged 16%, with gross profit up 9% YoY. Nigeria played a key role in the company’s performance, accounting for nearly all of the global volume decline, due to price elasticity impacts following Q1 price increases. The devaluation of the Nigerian Naira negatively affected net sales.
Despite these challenges, Nigeria contributed to 16% organic sales growth in the region through strategic pricing. EPS came in at $1.01, surpassing analysts’ expectations, marking a 14% growth from the previous year.
In terms of liquidity, Kellanova’s (NYSE:K) cash flow generation remained strong. The company experienced a YoY increase in free cash flow and maintained debt leverage below target. They also raised their free cash flow outlook to over $1 billion, driven by robust operating profit. Additionally, significant cash was returned to shareholders through dividends.
On August 14, an announcement was made that Mars would acquire Kellanova for $36 billion. This acquisition is set to transform Mars into a leading player in the global snacking market, expanding its presence in both sweet and savory categories. The deal is expected to be executed within the first half of 2025.
Kellanova’s share price surged 8.61% in the past month and 43.30% year-to-date, fueled by strong financial performance. It could also be partly linked to the use of AI, ML, and data analytics, which are optimizing operations and driving innovations like the Pringles Harvest Blends.
Declines in revenue, especially in Europe and Asia Pacific, were noted. Moreover, sales declined 4.7% YoY due to currency fluctuations and the divestiture of its Russia business. Despite these challenges, the company raised its 2024 guidance, signaling a positive outlook.
As of Q2 2024, 45 hedge funds, with a combined investment of $2.1 billion, remain bullish on the stock, as per Insider Monkey’s database. Considering the company’s performance and outlook, Kellanova is featured on our list of the Best Organic Food and Farming Stocks to Buy, despite analysts currently giving it a consensus hold rating.
Overall K ranks 3rd on our list of the best organic food and farming stocks to buy. While we acknowledge the potential of K as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than K but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
