Elders Limited (ASX:ELD), a AU$808.4m small-cap, operates in the consumer staples sector, which is facing a change in consumer taste and pressure for organic and sustainable foods, spurred by more health-conscious consumers. Consumer staple analysts are forecasting for the entire industry, a positive double-digit growth of 26.9% in the upcoming year , and a massive growth of 75.7% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether Elders is lagging or leading in the industry.

See our latest analysis for Elders

What’s the catalyst for Elders’s sector growth?

Disruption from consumers is becoming more prominent than that of industry competitors. Consumers are predominantly leaning towards more health-conscious alternatives such as whole and raw ingredients. Furthermore, companies that are now emerging are latching on these trends with efficient business models. In the past year, the industry delivered negative growth of -1.4%, underperforming the Australian market growth of 13.8%. Elders leads the pack with its impressive earnings growth of 56.1% over the past year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be -45.2% compared to the wider food product sector growth hovering in the twenties next year. As a future industry laggard in growth, Elders may be a cheaper stock relative to its peers.

Is Elders and the sector relatively cheap?

Food product companies are typically trading at a PE of 20.27x, in-line with the Australian stock market PE of 17.16x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 9.6% compared to the market’s 12.0%, potentially indicative of past headwinds. On the stock-level, Elders is trading at a lower PE ratio of 6.72x, making it cheaper than the average food product stock. In terms of returns, Elders generated 42.5% in the past year, which is 32.9% over the food product sector.

Next Steps:

Elders is a food product industry laggard in terms of its future growth outlook. This is possibly reflected in the PE ratio, with the stock trading below its peers. If the stock has been on your watchlist for a while, now may be the time to dig deeper. Although the market is expecting lower growth for the company relative to its peers, Elders is also trading at a discount, meaning that there could be some value from a potential mispricing. However, before you make a decision on the stock, I suggest you look at Elders’s fundamentals in order to build a holistic investment thesis.