Stock Analysis & Ideas

Here’s Why Analysts are Bullish on These Three Consumer Stocks

Story Highlights

The rising food prices are eating away at not only consumers’ budgets but are also impacting food companies and quick service restaurants (QSRs). Considering the soaring food inflation, are consumer stocks a Buy right now?

Inflation is eating away at customers’ budgets as prices soar from fuel to commodities, including food. Even the most recent numbers from the U.S. Bureau of Labor Statistics echo the same trend of increasing food prices.

According to data from the U.S. Bureau, the Consumer Price Index (CPI) went up 1% in May on a seasonally adjusted basis. This rise in CPI was “broad-based,” with the food index increasing 1.2% in May.

This data also indicated that grocery prices rose 11.9% year-over-year, the largest yearly increase since April 1979, while prices at restaurants went up 7.4% year-over-year, the largest yearly hike since November 1981.

This scenario makes producing and selling food an expensive affair. According to a Wall Street Journal report from last week, some of the United States’ biggest suppliers and restaurants, including Kraft Heinz (NASDAQ: KHC) and McDonald’s, have indicated that they will continue to raise prices as producing food becomes expensive.

In such a situation, are consumer stocks worth investing in right now? Will a hike in food prices translate to higher profits for restaurants and food companies or eat into their profits due to rising costs?

Using the TipRanks database, we looked at three such stocks from the Consumer sector that analysts are still bullish about. Let us take a look.

McDonald’s Corp. (NYSE: MCD)

Food inflation has been a major concern for McDonald’s, the Quick Service Restaurant (QSR) chain. MCD’s management had indicated on its Q1 earnings call that it expects inflation to persist this year.

Kevin Ozan, McDonald’s CFO, elaborated more on this at its Q1 earnings call. Ozan pointed out that MCD had hiked its prices by 8% year-over-year in Q1 in the United States. The company’s management admitted that this has led to smaller order sizes, which are higher in number than pre-COVID but still lower on a year-over-year basis.

But these inflationary pressures aside, Ozan still expects MCD to maintain its operating margins in the low-to-mid 40% range.

For Evercore analyst David Palmer, MCD is still worth a Buy in this tough macroeconomic environment. The analyst believes that MCD “presents [consumer] staple-like demand with some inflation protection through its franchised business model and superior value to consumers,” and will continue to gain market share in the U.S. and in key international markets.

The analyst is of the view that in 2023, pricing will “begin to catch up to inflation as mobility has likely recovered.” What’s more, Palmer also anticipates that MCD’s current dividend yield of 2.3% is likely to grow in the high single digits over the long term.

As a result, Palmer reiterated a Buy rating and a price target of $285 on the stock. The analyst’s price target implies an upside potential of 19.4% at current levels.

Other analysts on the Street are also bullish about MCD with a Strong Buy consensus rating based on 23 Buys and four Holds. The average MCD price target is $279.64, which implies a 17.1% upside potential to current levels.

Mondelēz International (NASDAQ: MDLZ)

Mondelēz is a snack, beverage, food, and confectionary company whose portfolio of brands includes Cadbury Dairy and Toblerone chocolate, as well as Oreo, belVita, and LU biscuits.

Higher food input costs and supply chain challenges have also impacted Mondelēz, causing the company to announce price increases across many of its markets during its Q1 earnings call. The company’s management stated on its Q1 earnings call that it expects input cost inflation to be “in the low double-digit range for 2022 versus our prior view of approximately 8%.”

Considering the higher inflation, MDLZ anticipates its FY22 earnings to range from “mid-single to high single digit.”

Besides increasing its prices, Mondelēz’s Chairman and CEO, Dirk Van de Put, stated on its Q1 earnings call that its “commodity costs are about 85% hedged for the year and near fully hedged in key areas.”

Mizuho Securities analyst John Baumgartner approves of these moves and thinks MDLZ is well-positioned and the company’s “new distribution, innovation, intl. [international] pricing oppty. [opportunity] and upside to cost savings underpin its appeal.”

As a result, the analyst is bullish about MDLZ with a Buy rating and a price target of $75 on the stock, which is nearer to the Street high price target of $76. Baumgartner’s price target implies an upside potential of 26.7% at current levels.

The rest of the analysts on the Street are also optimistic about the stock with a Strong Buy consensus rating based on 11 Buys and one Hold. The average MDLZ price target is $72.18, which implies a 23.5% upside potential to current levels.

The Wendy’s Co. (NASDAQ: WEN)

The Wendy’s Co. was founded in 1969, and this QSR chain is renowned for its fresh beef, freshly -prepared salads, and made-to-order hamburgers. The challenging macro environment seems to be weighing heavily on Wendy’s investors as the stock has tanked 26% this year.

Inflation also dragged down Wendy’s company-operated restaurant margins by 5.4% to 11.6% in Q1. Gunther Plosch, Wendy’s CFO, commented on its Q1 earnings call that this decline in margin “was driven primarily by higher-than-expected commodity and labor inflation in the high teens and mid-teens, respectively, customer count declines…and the impact of investments to support our entry into the U.K.”

However, even with the macro headwinds, WEN reaffirmed its FY22 outlook and continues to expect its global sales to grow in the range of 6% to 8%, with adjusted EBITDA likely to be between $490 million and $505 million. Adjusted earnings are anticipated to come in between $0.82 to $0.86 per share.

Wedbush analyst Nick Setyan, while acknowledging the inflationary headwinds, expects “management speak to resumption of growth in 2023” and thinks that “share repurchases alone could drive HSD [high single digit] annual FCF [free cash flow]/share growth.”

WEN remains on Setyan’s “Wedbush Best Ideas List” and the analyst continues to be upbeat about the stock with a Buy rating and a price target of $23, implying an upside potential of 30.2% at current levels.

The rest of the analysts on the Street are cautiously optimistic about the stock with a Moderate Buy consensus rating based on 11 Buys and 10 Holds. The average WEN price target is $22.33, which implies a 26.4% upside potential to current levels.

Bottom Line

From this list, it seems that these three consumer stocks are well-positioned to grow even in the current challenging macroeconomic situation.

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