Credit Suisse Double Downgrades Kraft Heinz To Underperform

Kraft Heinz Co KHC is a global food giant with No. 1 or No. 2-ranked market share in 17 different categories. But at the same time, Credit Suisse finds multiple reasons investors should drop their bullishness on the stock.

The Analyst

Credit Suisse's Robert Moskow downgraded The Kraft Heinz Company's stock rating from Outperform to Underperform with a price target lowered from $77 to $55.

The Thesis

Kraft Heinz's stock has "devalued considerably" since the start of 2018, but there are reasons to expect further downside, Moskow said in the downgrade note.

At Kraft Heinz under 3G Capital's control, an "alarming level" of young executives are quitting their jobs, according to Moskow's industry contacts. Performance bonuses were "cut to close to zero" in 2017 and top MBA students are even turning down job offers, he said.

In 2017, multiple events "shook investors' confidence," the analyst said:

Unilever NV (ADR) UN stating that a proposed merger poses no financial or strategic merit.
An organic sales decline of 15 percent in Canada.
Cold cuts and cheese brands saw market share losses to private labels.
The loss of distribution at Sam's Club for Planters peanuts.
Issues at the Ore Ida frozen potatoes facility continue to persist.

Kraft Heinz's management said in a February presentation that its merger savings since 2015 stood at $1.725 billion, but have now come to an end, Moskow said. This should be concerning, as it comes at a time when margins are likely at their peak and sales are stagnating, the analyst said.

Food companies like Kraft Heinz have no choice but to reinvest in their products given a weak macro environment — likely at the expense of margin structure, which could come in worse than what the consensus estimate is calling for today, according to Credit Suisse.

"The company has taken many steps to clean up its ingredients, modify flavor profiles and improve packaging," Moskow said. "However, what it describes as innovation is really just more renovation."