Ever since Amazon.com (NASDAQ:AMZN) bought grocery store Whole Foods, investors have been wondering what it means for the future of the grocery industry in the U.S. One thing that's clear is that the marriage of e-commerce and grocery shopping is a long-term growth trend. But how to invest in it? One answer comes from the need to store and transport refrigerated food, so let's take a look at how you can make money from this trend.
Online grocery trends
Leading industry analysts believe online grocery sales could reach $100 billion by 2024, up from around $19 billion in 2017. That's a huge number, and it implies a significant increase in the revenue of online grocers and the infrastructure needed to service it.
You could choose to play the guessing game of which online grocer will win out within a highly competitive and low margin industry, or you could buy some of the infrastructural plays that will win out regardless of which grocer dominates the market. This article will focus on the latter.
The most obvious place to start is with the cold storage facility needed to service the growth in online groceries. Unfortunately, the temperature-controlled warehouse market is highly fragmented in the U.S., and the only way to get significant exposure is through Americold Realty Trust (NYSE:COLD). The company styles itself as "the only publicly traded REIT focused on temperature-controlled warehouses" and claims 26% market share in the U.S.
That's good news. However, as is usually the case with real estate trusts in expansionary mode, you need to keep an eye on the underlying metrics, because there's always the danger that the company could be overreaching with acquisitions and reducing the quality of its portfolio.
Unfortunately, there's cause for introspection, here. For example, management expects global warehouse same-store sales growth of just 2% to 4% on a constant currency basis in 2019 -- same-store revenue growth was just 2.7% in the first quarter. Moreover, in the recent first-quarter earnings report, the company's global warehouse same-store physical occupancy rate declined to 74.3% from 76.8% in the same period in 2018 -- the economic occupancy rate also declined to 78.6% from 80.4%.
Other investment options
Another way to invest in the theme is to buy stock in companies that provide the technology to enable cold chain storage and transportation. For example, Emerson Electric's (NYSE:EMR) commercial and residential solutions segment has a line of industrial refrigeration compressors that are used for cold storage warehouses.
Emerson Electric and United Technologies
All three are attractive stocks in their own right. Emerson Electric trades on an attractive free-cash-flow based valuation with a near 3% dividend yield, and some of the issues holding back its revenue growth -- largely oil and gas-related capital spending -- in the first half may turn out to be temporary, particularly if the price of oil continues to recover from the sub-$50 level it hit at the end of 2018. However, given that cold chain solutions made up just 7.6% of total sales in 2018, it's not the key driver of Emerson's sales performance.
United Technologies' refrigeration sales make up less than a quarter of Carrier's overall sales, and Carrier's is part of a large industrial conglomerate. However, the good news is that Carrier will be spun off, and it's arguably the most attractive of the three companies that the current United Technologies will ultimately become.
At that point, it will be well worth taking a close look at the company -- not least because it will be free to participate in the much-anticipated round of consolidation in the heating, ventilation, and air conditioning industry (HVAC).
United Technologies' rival is also breaking up; Ingersoll-Rand will spin off its motley collection of industrial business (which will keep the parent company's name) and then merge it with Gardner Denver (NYSE:IR). Meanwhile, the remaining commercial and residential HVAC and transport refrigeration business will carry on as a near-$13 billion revenue climate control business.
Just as with Carrier, the transport refrigeration business (Thermo King) represents less than a quarter of the new climate company's sales (around 20%), so cold-chain-focused sales aren't its primary activity.
How to invest in the cold chain theme
Unfortunately, there isn't an attractive pure-play stock on the market right now, and Emerson Electric isn't going to break up anytime soon. A better way to think about investing is to positively view the long-term outlook for the transport refrigeration business of Carrier and the climate business of Ingersoll-Rand. In this way, if you like the outlook for Ingersoll-Rand and Carrier, then their cold chain operations are an added support.
Fortunately, they are both attractive HVAC businesses in their own right, so when the time comes, investors can think about getting exposure to a strong investment theme by buying stock in both companies.