UPDATE: Goldman loses appetite for food stocks, downgrades Kraft Heinz
By Ciara Linnane, MarketWatch
Goldman downgrades Kraft Heinz to neutral, sticks with sell ratings on J.M. Smucker, General Mills and Procter and Gamble
Goldman Sachs downgraded the stock of food company Kraft Heinz Co. to neutral from buy Wednesday, and said a squeeze on margins is putting earnings estimates at risk.
The move came as part of a broader recalibration of Goldman's estimates and price targets for the food and household and personal care (HPC) sectors against a backdrop of rising input costs.
"While FX pressure has abated and sales trends are improving for many, we see increasing risk to margin expectations as renewed input cost pressure sustains (or mounts) for many as pricing power is challenged, particularly in the U.S.," analysts led by Jason English wrote in a note.
Goldman is sticking with sell ratings on J.M. Smucker Co. (SJM), General Mills Inc. (GIS), Church & Dwight Co. Inc. (CHD) and Procter and Gamble Co.(PG). The latter two stocks "have greater absolute downside given elevated valuation.
"From a long-perspective, our bias remains tilted toward M&A optionality stories (e.g., Pinnacle Foods (PF), Kimberly-Clark Corp.(KMB)) and multi-national companies with exposure to outsized growth potential in an increasingly growth starved universe (e.g., (MDLZ) Estée Lauder (EL) )," said the note.
It singled out Mondelez as being especially well-placed for growth with a compelling valuation. The price estimates changes can be found in the table below:
Most of the bank's negative estimate revisions come in the food sector, where input costs have built after a three-year period that was benign. In some instances, revisions were due to plans by management to make investments. Pinnacle Foods, for example, is planning to invest in its supply chain this year, while Mondelez is gearing up to invest to spur demand next year.
Read also:Millennial diners are liking what they see of late from Domino's, Taco Bell and Starbucks (http://www.marketwatch.com/story/dominos-taco-bell-and-starbucks-are-doing-this-right-2017-10-03)
See: Restaurateur Danny Meyer starts $220 million private-equity fund (http://www.marketwatch.com/story/restaurateur-danny-meyer-starts-220-million-private-equity-fund-2017-10-01)
Goldman is below FactSet consensus estimates for every name in its food sector coverage apart from Post Holdings Inc. (POST), the maker of cereals and PowerBar snacks, said the note.
Revisions in the HPC space are smaller. Analyst have also factored into estimates for Energizer and Clorox the recent hurricanes that are expected to create near-term upside.
See:Here's why flagship stores for retailers like Apple and Starbucks have become tourist attractions (http://www.marketwatch.com/story/heres-why-flagship-stores-for-retailers-like-apple-and-starbucks-have-become-tourist-attractions-2017-09-18)
Kraft Heinz has beaten its peers in generating earnings growth in recent years, as it captured cost saving relating to the Kraft acquisition.
"Cost savings, however, are beginning to deplete and while we see a path to top-line acceleration for the firm, we expect its magnitude of fundamental outperformance versus the group to wane," said the note.
See:Kraft Heinz names 29-year old ex-Goldman banker David Knopf as CFO (http://www.marketwatch.com/story/kraft-heinz-names-29-year-old-ex-goldman-banker-david-knopf-as-cfo-2017-09-08)
Kraft Heinz makes 77% of its operating profit in the U.S., where industry pressure of change is most pronounced.
Shares were flat Wednesday, but are down about 11% in 2017. The Consumer Discretionary Select Sector SPDR exchange-traded fund (XLY) has gained about 12% in 2017, while the S&P 500 has gained 13% and the Dow Jones Industrial Average has climbed about 15%.
Read: Nestlé cedes ground to Loeb, but not on L'Oréal (http://www.marketwatch.com/story/nestle-cedes-ground-to-loeb-but-not-on-loreal-2017-09-26)
-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com
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10-06-17 0658ETCopyright (c) 2017 Dow Jones & Company, Inc.