The US registered broker said in a note to clients: “We are downgrading our rating on packaged food to neutral from positive, as we now see a less compelling risk/reward scenario for the group.”
A positive rating means that valuations are improving, whereas neutral means that valuations are steady, neither improving nor deteriorating.
Barclays highlighted the recent deflation in exchange-traded commodities such as grains and fuel and said this could indicate a more immediate margin benefit for food manufacturers, even with no further pricing going through.
However, the company added: “The reality is that higher cost hedges already in place for the next several quarters will likely limit the potential downside in input costs for food manufacturers in the near-term (and thus, mute much of the associated benefit).”
Similarly the fact that falling commodity prices have been so high-profile could continue to raise pressure on any additional price increases that manufacturers must take.
It said: “These dynamics have the potential, in our view, to drive greater pushback from retailers and/or encourage greater retailer support of private label such that branded manufacturers ultimately feel the need to be more competitive at the shelf through more intense promotion.”
The companies that constitute the sector referred to by Barclays are B&G Foods, Campbell Soup, ConAgra Foods, General Mills, Hain Celestial, Heinz, H J Co, Kellogg Co, Kraft Foods, McCormick & Co, Ralcorp Holdings, Sara Lee Corp, The Hershey Company and TreeHouse Foods.
In February, Barclays upgraded the sector from a negative rating (valuations are deteriorating) to positive.
It said: “We still may see some degree of earnings acceleration in the food group, particularly in 2H09 as some higher cost hedges roll off and companies benefit from lower costs.
“However, visibility to this - and to how robust the acceleration might ultimately be - is now less obvious to us, as much of this is predicated on pricing sticking in a tenuous consumer environment.
“This is why we are notching down our rating to neutral rather than to a more negative stance.
“Though, to the extent that food companies are forced to promote away the majority of recent pricing "success", this would surely present a more negative scenario for the group, in our view, and could merit a ratings reassessment once again.”
The Barclays Capital Fundamental Equity Research Rating System provides sector views which rate the outlook for the sector coverage universe as positive, neutral or negative.