Kraft Heinz and J.M. Smucker upgraded as analysts say Ozempic fears are overdone

By Ciara Linnane and Eleanor Laise

U.S. food stocks suffer worst underperformance in more than two decades amid angst about weight-loss drugs' impact

Bernstein analysts on Tuesday upgraded shares of Kraft Heinz Co. (KHC) and J.M. Smucker Co. (SJM), saying the stocks have been overly punished amid concerns about the proliferation of a new class of weight-loss drugs.

The analysts upgraded Kraft Heinz, whose brands include Oscar Mayer and Jell-O, to outperform from market perform and upgraded J.M. Smucker, maker of Hostess Twinkies and Jif peanut butter, to market perform from underperform.

The upgrades come as U.S. food stocks are suffering their worst underperformance in over two decades, the analysts wrote, with the sector down 21% in the year to date while the S&P 500 SPX has climbed 14%. As in some other sectors, such as medical technology stocks seen as vulnerable to the obesity drug boom, the selloff in food stocks accelerated after Novo Nordisk (NVO) in August released topline results from a study finding cardiovascular benefits in patients taking the weight-loss medication Wegovy, the Bernstein analysts noted. In the three months following the study's initial release on Aug. 8, the U.S. food sector fell an additional 14%, while the market fell 4%, the analysts wrote.

The popularity of GLP-1 drugs such as Wegovy and Ozempic has led analysts to speculate that food companies that make fatty or salty snacks or processed food will lose ground as consumers opt for lower-calorie choices. Many makers of snacks, food packaging and other products rocked by the weight-loss-drug phenomenon have worked in recent weeks to calm investors' fears about the medications' potential impact on their bottom line.

The selloff is overdone, the Bernstein analysts wrote. If GLP-1 drug use climbs to about 10% of U.S. adults in the next five years, from about 1% today, that could trigger a 2.5% reduction in calories consumed, for an annual food volume headwind of about 0.5% per year, according to the report.

Kraft Heinz is relatively well positioned for the GLP-1 drug wave, the Bernstein analysts wrote, given its protein-heavy portfolio. The analysts had a $40 price target for the stock.

At Smucker, the recent acquisition of Hostess Brands may make the company more vulnerable to the growth of GLP-1 drugs, but the stock is cheap on an absolute basis and relative to its peers, the analysts wrote. The analysts' price target for the shares was $119.

Oreo maker Mondelez International Inc. (MDLZ) is also somewhat insulated from GLP-1 concerns, thanks to its international exposure, the Bernstein analysts wrote. And Simply Good Foods Co. (SMPL), maker of Atkins branded foods and Quest protein bars, "holds the best positioned portfolio for any broad based increase in GLP-1 use," based on its high-protein, low-carb products, according to the Bernstein report.

For the U.S. food sector overall, valuations are now at "historically low levels," the analysts wrote, and "the risk-reward for the sector is balanced, with near-term performance skewed to the upside."

Kraft Heinz stock was up 2.2% premarket on Tuesday and is down 18.4% in the year to date, while Smucker shares were up 0.5% premarket and have dropped 31.7% so far this year.

-Ciara Linnane -Eleanor Laise

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11-14-23 0909ET

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