Investors can anticipate a surge in deal activity within the U.S. food sector in 2024 as companies seek to enhance the growth potential of their portfolios. Stifel analysts expressed this viewpoint in a recent note, where they reiterated a neutral rating on the group. Despite offering a valuation that stands at a roughly 20% discount to the S&P 500, caution is advised due to uncertainties surrounding revenue-growth pacing, potential increased promotional activity, and the risk of private-label market-share gains. Analysts led by Matthew E. Smith emphasized selectivity when considering investments in the food sector.

Potential Deals on the Horizon

According to the note, deals such as spinoffs, acquisitions, and divestitures are likely to materialize now that balance sheets have improved and cash flow is expected to grow. Although the analysts do not possess specific knowledge of planned deals, they identified companies with favorable balance sheets prepared for acquisitions, including General Mills Inc., Kellanova Inc. K, Kraft Heinz Inc., Mondelez, Hershey Inc. HSY, and Nestlé CH:NESN.

Positive Financial Outlook Encourages Growth

With debt levels decreasing and robust cash flow, large-cap food companies are projected to generate $8 billion in free cash flow after dividends this year. However, these companies are grappling with an uncertain recovery trajectory for volumes amid an inflationary environment. Stifel expects modest organic sales growth of 2% for the group in 2024 and a 4% increase in per-share earnings. The note emphasizes a forecasted improvement in volume growth throughout 2024, with traction expected in the second half of the year.

Cost-Inflation Trends and Predictions for 2024

Cost-inflation trends are showing signs of improvement and are expected to decrease slightly based on current input prices, with the added benefit of lower prices at the end of the previous year. According to a recent note, Stifel's commodity index indicates a projected 1.5% decline in costs for 2024, following a high-single-digit decline in 2023.

Targeted Price Increases and Gross-Margin Performance

Considering the current input-cost environment, analysts anticipate targeted price increases instead of broad inflation. They also highlight the positive impact of productivity programs, which are expected to support an improving gross-margin performance throughout 2024. Stifel predicts a 40 basis point expansion for the year.

Market Share Dynamics and the Impact of Economic Conditions

While private label brands have been gaining market share, their growth rate has been relatively subdued in 2023. However, there is a possibility of acceleration in 2024 if economic conditions weaken, leading consumers to opt for more home-cooked meals over dining out at restaurants.

Recommended Stocks for Investment

Stifel recommends a selection of stocks that it rates as "buy." These stocks include BellRing Brands (BRBR), General Mills (GIS), Kraft Heinz (KHC), Lamb Weston (LW), Mondelez (MDLZ), Post Holdings (POST), Simply Good Foods (SMPL), Vital Farms (VITL), and Westrock Coffee (WEST).

Hold Ratings on Selected Companies

In addition to its buy recommendations, Stifel also has hold ratings on several companies, including Conagra Brands Inc. (CAG), Campbell Soup Co. (CPB), Hain Celestial Group Inc. (HAIN), Hershey Co., WK Kellogg Co. (KLG), McCormick & Co. (MKC), J.M. Smucker Co. (SJM), Sovos Brands Inc. (SOVO), and TreeHouse Foods Inc. (THS).