Investing.com — The U.S. grocery sector appears to be very cheap relative to the broader market, prompting questions among investors about whether this is a good opportunity to enter, Bernstein analysts said in a note.
The sector, which underperformed the market by more than 30% in 2023 and 2024, is now trading at its most affordable level in more than two decades. This estimate is despite the sector’s trading data aligning with its 20-year average on an EV/EBITDA basis, according to Bernstein’s analysis.
But despite the attractive valuation, the investment bank warns investors of potential headwinds that could turn the sector into a value trap. The use of GLP-1 drugs and the move away from highly processed foods are the primary problems.
Still, an upside is emerging in the form of improved consumer sentiment among low-income households, which could reduce the “value-seeking behavior” that has weighed on businesses in 2024, analysts said.
Bernstein emphasizes the importance of monitoring the FDA’s shortage drug list in 2025, as the uptake of GLP-1 drugs continues to affect volumes. Tablet versions of these drugs are expected to hit the market in 2026.
External studies show that the adoption of GLP-1 significantly affects the consumption of processed foods, which could especially affect the sales of sweet and salty snacks, as well as fries and hamburgers in the quick service restaurant (QSR) channel.
Regulatory challenges could also arise, Bernstein notes, particularly if Mr. RFK Jr. be appointed to a position where he could influence food policy. His potential policy could include banning certain food additives or restricting a wider set of additives already banned in the European Union.
“At face value, companies could quite easily reformulate their products at relatively low cost to respond to such regulation,” said analysts led by Alexia Howard.
“But the impact of greater media focus on the links between healthy food choices and chronic health conditions in the minds of consumers could have a greater impact on dietary trends, much like it did in 2012 during the time of GMOs.” labeling law in California,” they added.
Apart from these key points, analysts also point to rising costs for commodities such as cocoa and coffee, while other input costs remain relatively stable. To support volumes, companies may need to increase promotional activities.
As for merger and acquisition (M&A) activity in the sector, analysts expect it to continue throughout the year, with Simply Good Foods (NASDAQ: ) identified as a likely acquisition target. The involvement of activists could also encourage wider consolidation among the industry’s larger players.
The research firm concludes with its top sector picks, favoring Mondelez (NASDAQ: ), McCormick (NYSE: ), Simply Good Foods and Hain Celestial (NASDAQ: ) for long positions.
