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Investing.com -- Morgan Stanley initiated coverage of U.S. packaged food industry stocks in a note Monday, with a cautiously In-Line outlook, citing low earnings visibility and rising margin headwinds.
The firm acknowledged the muted topline growth and secular consumption challenges, which it believes will constrain growth in the sector.
However, amid these challenges, Morgan Stanley (NYSE:MS) sees potential for modest sequential topline improvement due to stabilizing food-at-home trends.
The firm is optimistic about certain stocks within the sector and has highlighted BellRing Brands (NYSE:BRBR) as its top pick.
According to the bank, "the recent pullback creates a compelling entry point for a scarce growth asset with attractive category exposure and near-term momentum."
In terms of broader stock selection, Morgan Stanley remains Overweight on Mondelez (NASDAQ:MDLZ), The J.M. Smucker Company, and Vital Farms, all of which are said to be positioned well in key growth categories.
The analysts see Mondelez benefiting from higher-growth geographies and durable pricing power, while Smucker’s coffee portfolio shows resilience against cost inflation.
On the other hand, the firm is Underweight on Kraft Heinz (NASDAQ:KHC), Kellogg’s, and General Mills (NYSE:GIS) due to concerns over weaker topline trends and lower earnings visibility.
They caution that Kraft Heinz may struggle to reverse market share losses despite increased investment.
While the outlook remains guarded overall, Morgan Stanley suggests that the sector’s defensive characteristics and undervaluation provide an attractive risk/reward profile, with BellRing Brands standing out as a key growth opportunity in a challenging environment.