Food stocks are part of one of the classically defensive industries on the TSX: consumer staples. This defensiveness has made TSX food stocks outperform in the last five years, as the economic environment was faced with many struggles. But what should we expect now?
Here are two top TSX index food stocks to watch.
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Loblaw: Canada’s premier food stock
Loblaw Companies (TSX: L) is Canada’s largest food retailer and leading pharmacy outlet, with more than 2,400 stores across Canada and $59.5 billion in revenue in 2023. During the last five years, Loblaw’s stock price has soared more than 130% to over $156 per share. Today, the stock trades at 18 times this year’s expected earnings.
This food stock has a special place in Canada’s food industry, benefiting from its leading position in food retail and its exposure to the pharmacy business through Shoppers Drugmart. This has helped it thrive despite recent inflationary pressures that are negatively impacting the company and consumers alike. For example, Loblaw is a higher-priced grocery alternative in the Canadian market. As inflation has soared, consumers have been trading down to cheaper food items.
Despite this, Loblaw has been thriving as the company introduces more private-label, less-expensive alternatives to its shoppers. In the first quarter of 2024, the company’s discount banners and private label brands drove higher store traffic and strong market share gains. Revenue increased 4.5% to $586 million, and earnings per share (EPS) increased 14% to $1.47.
Maple Leaf Foods
Maple Leaf Foods (TSX: MFI) is Canada’s largest prepared meats and poultry producer. It has been a staple for Canadians for more than 100 years, and it is a TSX index veteran. The company has a long history of supplying prepared meats for the dinner table. This business has served the company well for many decades and remains highly defensive.
Maple Leaf Foods stock hasn’t performed nearly as well as Loblaw’s stock. As you can see from its price graph below, things have actually been difficult as of late. Even defensive businesses go through hard times. Maple Leaf Foods is no exception.
The post-pandemic environment left Maple Leaf struggling with inflation, lower volumes, and declining profits and margins. This was reflected in the company’s results, with declining margins and earnings hitting the stock hard. For example, in 2022, EPS came in at a loss of $0.26.
In response, the company has had to work hard to innovate, drive new processes and new efficiencies. And this has been bearing fruit. For example, in Maple Leaf’s first-quarter 2024 results, the company reported a 174% increase in adjusted operating earnings, a 54.6% increase in adjusted earnings before interest, taxes, depreciation, and amortization, and a 493% increase in free cash flow.
Over the long run, I think that we can view Maple Leaf Foods’s troubles as temporary. In fact, the business is stabilizing, and the company is facing a future of moderating inflation and improving pork market conditions.
Given the troubles that Maple Leaf Foods has been experiencing, it should come as no surprise to hear that the stock is attractively valued given its expected earnings growth. In fact, it trades at 29 times this year’s expected earnings and 15 times next year’s, with expected growth rates of 100% and 44% in 2025 and 2026.
