Morgan Stanley analyst Matthew Grangier sees a solid year ahead for food makers.
As he initiated coverage of the industry with a research note Tuesday, he noted that food makers and sellers typically benefit during a weak economy because consumers still need to eat — and they tend to do so at home more often.
The past few years have been tough for the food industry, however. Companies have struggled with higher costs for fuel and other commodities that they need to make and transport their products. They've raised prices to offset that pressure, but consumers remain very cost-conscious.
Grangier said cost pressures may ease this year, and corporate restructurings have created opportunities for growth, while sales of house-brand foods have stabilized, lessening competitive pressure on the makers of name-brand products.
"Pricing power and input cost inflation are two of the primary drivers of investor sentiment in packaged food," Grangier wrote. "Both are poised to align favorably for food manufacturers into 2012."
Grangier favored global companies with near-term earnings growth potential such as Kraft Foods Inc., Mead Johnson Nutrition Co. and General Mills Inc., to which he gave an "Overweight" rating.
He gave H.J. Heinz Co. and Campbell Soup Co. "Underweight" ratings because Campbell is in the midst of a turnaround effort and Heinz may underperform peers in some markets. He gave The Hershey Co. and Kellogg Co. "Equal-Weight" ratings.
U.S. packaged-food stocks have generally outperformed the market over time, and Grangier expects that to continue.
Shares of several key food makers' stock rose 1 percent or less on Tuesday, slightly more than the broader markets.
Mead Johnson shares rose 77 cents to close at $75.94. General Mills shares rose 46 cents to $39.80. Kraft shares rose a dime to $38.50 and Campbell stock rose 18 cents to $31.81.
Shares of Heinz fell 34 cents to close at $51.69.