- Ken Goldman of JPMorgan is expecting packaged food companies to offer investors an "attractive" 14 percent return between now and the end of the year.
- Goldman introduced a new six-pronged approach towards valuing food stocks
- Goldman warned not to short the sector, even Underweight-rated stocks, given potential upside to Street estimates.
Packaged food investors should pay close attention to Ken Goldman of JPMorgan as he introduced a new approach to valuing food stocks in a note on Wednesday.
The analyst's new method of valuing stocks assigns a percentage likelihood to: 1) base fundamental case, 2) upside fundamental case, 3) downside fundamental case, 4) buyer on the M&A front, 5) seller on the M&A front, 6) investor activism.
Goldman said using a scenario-based framework is not only "reasonable" but it is "necessary" in today's environment given the fact that many companies in the space have sold/divested assets, been targets of activist investors, acquired smaller food companies, and introduced major cost-cutting programs.
Goldman added that his new valuation technique concluded the best way to make money in the group is to invest in companies that have "sustainably strong" top lines. Moreover, even if a company is active on the M&A front as a buyer, the stock may not necessarily see upside.
As an example, there is a 60 percent chance that Kraft Heinz Co KHC 1.3% will acquire "another larger" food company in the next few years. However, the analyst sees "relatively limited" upside in the stock because he sees a lack of growth beyond what's already priced in to the current valuation.
"Overall we remain modestly constructive on the packaged food space," Goldman wrote. "On the positive side, interest rates continue to render bond proxy industries such as food attractive (we do not think the expected 25 basis points Fed Funds Rate hike will matter much to the sector's relative appeal). We also see continued margin improvements – both from cheaper commodities and cost savings efforts – as well as generally easier comparisons."