Susquehanna Downgrades Kraft Heinz After Q3 Earnings Miss

Food company Kraft Heinz Co KHC reported Thursday afternoon with third-quarter results that fell short of the Street's estimates and prompted Susquehanna to turn bearish on the stock.

The Analyst

Susquehanna Financial Group's Pablo Zuanic downgraded Kraft Heinz from Neutral to Negative with a price target lowered from $59 to $47.

The Thesis

Kraft Heinz's Q3 report was notable for an 8-percent EBITDA miss due to multiple one-time events, Zuanic said in the Friday downgrade note. (See his track record here.) 

While this could be attributed to a catch-up in spending after two years of cost-cutting initiatives there are valid questions related to the real impact of higher spending in categories like cheese, cold cuts and nuts, which account for more than half of all sales, the analyst said.

Kraft Heinz is no longer sticking with its guidance for EBITDA in the back half of 2018 to be in-line with the first half of the year, Zuanic said. This creates limited visibility moving forward and warrants a reduction in fiscal 2019 and fiscal 2020 earnings per share estimates by 6 to 7 percent, he said. 

Susquehanna has multiple concerns about Kraft Heinz moving forward, the analyst said:

• Less confidence in management.
• Questions about the relationship between 3G and Warren Buffett.
• Net debt to EBITDA at four times.
• Uncertainty related to more divestitures.
• Low expectations for a M&A deal in the near and medium term.

Bottom line, Kraft Heinz's stock is trading near 16 times calendar 2019 estimated EPS, which represents an unjustified premium to the food group at 13 to 15 times, Zuanic said. 

Price Action

Kraft Heinz shares were trading down 8.58 percent at $51.38 at the time of publication Friday. 

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