Jim Salera, a restaurant, packaged-food, and beverage analyst at Stephens, talks food trends and stock picks -- like Wingstop and Celsius Holdings. By Evie Liu

Restaurants and packaged-food companies have faced a raft of challenges lately, many stemming from food price inflation, which has crimped consumer spending. The growing popularity of GLP-1 drugs, appetite suppressants that help users lose weight, also has dampened demand.

Yet, even as people dine out less and opt for more private-label products, investment opportunities remain, especially in smaller-cap food and restaurant stocks and niche product categories. Barron's recently checked in with Jim Salera, a restaurant, packaged-food, and beverage analyst at the investment bank Stephens, to learn more about Americans' shifting appetites and some promising companies in all three categories.

Salera has been following the food industry since 2019, with a focus on small- and mid-cap growth stocks. He shares his favorite stocks and an update on product trends (did someone say prebiotic soda?) in the edited interview that follows.

Barron's : Food inflation cooled in the past two years, but now there are fresh signs of price growth. What is the outlook for food inflation in 2025?

Jim Salera: There are pockets of greater inflation this year, especially in eggs, beef, and cocoa. Egg price inflation isn't a structural issue. When the avian influenza epidemic eventually rolls off and new chickens are hatched, you would expect to see egg prices fall back.

Beef prices are up as the herd count is lower than anticipated. But as the year progresses, prices could fall as grocery demand declines. There is such a thing as meat anxiety: If I am going to pay for higher-priced beef, I'd rather go to a restaurant and pay somebody to cook it for me so that I don't ruin it and waste my money. That could lead to demand destruction at retail.

The inflation in cocoa prices, partly due to weather issues in West Africa, has lasted longer than expected. Although we have seen chocolate supply diversify away from the region, cocoa prices are still meaningfully high year over year and well above historical norms. We have seen prices come down a little lately from the peak. The food industry still expects cocoa prices to normalize, but has limited visibility into what that trajectory looks like.

On other fronts, prices for commodities such as corn and soybeans have fallen. If you mash all these trends together, the expectation for overall food inflation is low-single digits -- maybe 2% to 3% this year.

What is the outlook for consumer spending, in light of this inflation forecast?

Wages have had several years to catch up with inflation. Real wage growth, adjusted for inflation, was negative from April 2021 to June 2023, but has turned positive since then. Consumers are starting to recoup some purchasing power. Potential policies such as tax cuts and interest-rate reductions could further free up incremental money for consumers to spend.

We have also seen both grocery stores and restaurants focus on value-centric messaging and promotions. It's all about getting consumers more comfortable and resetting expectations.

Robert F. Kennedy Jr., who was recently confirmed as head of the Department of Health and Human Services, has said he wants to make American food healthier. How would his proposed policies affect the food industry?

The easiest thing the industry would agree to do is what we have already seen -- remove artificial coloring in food. Certain companies use more of it than others, but it isn't pervasive across the industry, so there is unlikely to be a lot of pushback.

Talks about removing or limiting other ingredients could be more contentious. Whatever your view on the health risk of seed oils, they are cheap and help keep the price of food down. I don't know how the Food and Drug Administration would be able to limit their use.

Kennedy has also talked about better informing Americans about the health impact of artificial ingredients. That could possibly mean additional labeling, much as food producers now label added sugar. I could see that being another area of compromise, but additional labeling of artificial ingredients is unlikely to cause sales of packaged foods and beverages to plummet.

What other trends are you observing in the food industry?

There is a shift in messaging toward better-for-you, high-quality, nonartificial ingredients. Across many categories, brands are focused on establishing themselves around so-called clean-label products.

In salty snacks, Utz Brands owns a brand called Boulder Canyon, which uses avocado or olive oil in its chips. The brand has been growing by 50% to 60% at retail versus softness in legacy potato chips, many of which use vegetable oils. In the pasta sauce category, Rao's, owned by Campbell's, uses fresh tomatoes from Italy instead of tomato purée or paste.

On the beverage side, ready-to-drink protein shakes have benefited from an increased consumer focus on health and wellness. They are also a good nutritional compliment for people on GLP-1 drugs. A leading brand is Premier Protein, owned by BellRing Brands. There is also an emerging set of better-for-you sodas that are low in sugar and high in fiber and prebiotics that support digestive health. Three leading brands are Poppi, Olipop, and Zevia.

One challenge that many better-for-you products had in the past was that they didn't deliver on taste. The brands I mentioned all have taste profiles that are acceptable to a lot of consumers, and they are becoming replacements for more traditional products. These brands are often priced at a premium, but people are willing to pay.

Many food stocks with high valuations have tumbled in the past few weeks . What is ailing the industry?

There has been more uncertainty in Washington than people perhaps anticipated around policies related to the food stamps, artificial ingredients, and tariffs. On top of this, some companies reported top-line guidance that was a little lower than consensus expectations. Still, the combination of volume-driven revenue growth, improving margins, and reasonable valuations is a good filter to identify companies that are better positioned in the space. And we view the recent pullback as an opportunity to buy for long-term investors.

What is your top pick among restaurant stocks?

Wingstop is our best idea in restaurants. It has a simple menu but consistent quality. The company does a good job of marketing, both on social media and around popular sporting events. It also benefits from the long-term shift away from red meat to poultry as a primary source of protein.

Wingstop has a strong engagement from its franchisee base -- about 95% of new stores are opened by existing franchisees. The cash-on-cash returns, meaning how fast franchisees can recoup their cash investment in new restaurants, is strong compared with other chains.

Wingstop shares have fallen about 25% recently after the company missed fourth-quarter sales estimates. Does that concern you?

The company just issued $500 million of securitized notes in December, so higher interest expense could suppress earnings in 2025. But the business is highly profitable and there is room to add more new stores and increase consumer awareness. We expect Wingstop to boost revenue by 15% in 2025 and adjusted earnings by 5%. Earnings are expected to increase 36% in 2026 once the interest expenses come down. We rate the stock Overweight, with a price target of $400. [Shares recently traded around $230.]

In the full-service restaurant space, First Watch Restaurant Group, which serves only brunch, does a good job of refreshing its menu with popular items that are trending. The meals aren't as cheap as at places like Waffle House, but they are fairly affordable for a good experience.

First Watch has a good labor-retention rate, because there is only one shift. The staff does a good job of engaging with the guests and creating a neighborhood feel.

First Watch has ample opportunities for new unit growth. It currently has about 570 stores, many of which are in Florida, and has guided to around 2,200. We think there could be more than that.

We expect the company to grow sales by 15% in 2025, and adjusted earnings by 47%. We rate the stock as Overweight with a $25 target price, up from a recent $21.

What do you like in the packaged-food space?

Our best packaged-food idea is SunOpta. It makes products for other companies, such as plant-based milk for Starbucks, ready-to-drink protein shakes for BellRing, and organic fruit snacks, broth, and other beverage extracts sold by other companies.

SunOpta could see double-digit revenue growth and expanding margins. It still trades at a reasonable multiple of 30 times the next 12 months' earnings.

SunOpta has paid down debt by selling its frozen-fruit business. It just finished building a new manufacturing plant, so capital expenditure is decreasing. We expect the company to continue to pay down debt and buy back shares. We have an Overweight rating for the stock with a target price of $10. [SunOpta shares recently traded around $7.]

Zevia, as noted, sells better-for-you soda. Historically, smaller soda brands have been scattered throughout grocery stores, but Zevia recently was included in a new display at Walmart called Modern Soda, right next to the legacy soda aisle. This puts it in direct competition with mainstream sodas. If these products, including Zevia's, are successful at Walmart, there will be an opportunity to get more shelf placement at traditional grocers such as Kroger and Albertsons.

Carbonated beverages is a category with $45 billion in annual retail sales. Zevia has only has $155 million in annual sales right now. There is a huge opportunity for the company to scale. I have an Overweight rating for the stock with a target price of $6, up from a recent $2.30 or so. [Zevia is a microcap stock with a market capitalization of $170 million.]

Celsius Holdings, a disrupter in the energy-drink space, saw slowing growth last year. It recently announced the acquisition of rival Alani Nu. What is your outlook for the company and the stock?

Celsius' market share in the energy-drink category has fallen from the high-water mark of 12.5% last May to 11% in January, according to Circana data. The stock had a premium multiple; at the high point last March, it traded around 80 times the next 12 months' earnings, compared with the S&P 500's 21 times at the time [and the stock's 28 times now]. It is easy for a high-multiple stock to lose momentum when there are headwinds in the business. The energy-drink category has been phenomenal, but a lot of big beverage companies are investing in the space. Celsius' challenge now is to regain investor confidence that it can resume its market-share growth.

The acquisition of Alani Nu would bring a whole new group of customers to Celsius with limited cannibalization, but it remains to be seen whether this could accelerate Celsius' core business, as well. If that happens, the stock is well below where it should be. I have an Overweight rating on Celsius stock with a target price of $40, up from a recent $27.

Thanks, Jim.

Write to Evie Liu at evie.liu@barrons.com.

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February 28, 2025 21:30 ET (02:30 GMT)

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