Margin Enhancement Drives Food and Beverage Multiple Expansion in 2016

Increased focus on cost-savings could lead to further consolidation in the wake of 3G’s successful Kraft Heinz merger.

Monday, February 13, 2017

Food and beverage companies delivered solid performance for investors in 2016. The S&P Food Products Index finished the year up 8.1%, which trailed the broader market; the S&P 500 was up 9.5%. This modest underperformance comes after the Food Products Index outperformed the broader market by more than five percentage points in both 2014 and 2015. More notably, the food and beverage industry saw significant multiple expansion during 2016. The median forward P/E ratio for food production companies increased from 19.8x in December 2015 to 25.4x in December 2016, and the median P/E ratio for food ingredients companies increased from 22.5x to 29.7x.

Several trends drove this multiple expansion during the year, including increased focus on cutting costs (either through internal measures or consolidation), takeover speculation, and a favorable environment for commodity prices and interest rates. We examine these trends and look at how they could impact M&A activity in the food and beverage industry in 2017.

Highlights of this issue of Food For Thought:

  • Focus on cost-cutting and consolidation leads to multiple expansion
  • Favorable commodity and interest rate environment support strong valuations
  • Stats on publicly traded companies and M&A activity
  • Outlook for M&A activity in 2017

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