Kraft Heinz (KHC): There Goes the Buy Rating, Merrill Lynch Downgrades the Stock

Investors weren’t impressed with Kraft Heinz (KHC) latest earnings report (to say the least), and at least one Wall Street analyst has had enough. Merrill Lynch analyst Bryan Spillane downgraded the stock on Friday, knocking his rating from Buy to Neutral, while reducing the price target to $39 (from $52), which implies about 12% upside from current levels. (To watch Spillane’s track record, click here)

Kraft said it earned 84 cents per share in the fourth quarter, on revenue of $6.89 billion. Analysts were looking for earnings per share of 94 cents on revenue of $6.93 billion. But the top- and bottom-line miss were the least of the company’s problems. Kraft Heinz said in a conference call discussing earnings that it cut its quarterly dividend to 40 cents, a 36 percent decrease from its previous quarterly dividend of 62.5 cents per share.

Spillane commented, “4Q18 results and FY19 outlook created the third time in 12 months that KHC has reduced its earnings outlook to accommodate incremental investments to support sales growth and absorb net commodity inflation as input costs increased and productivity didn’t materialize. Previously we were of the view that this would be contained to FY18 but today’s outlook made it clear that KHC is still re-basing costs and profits. Clearly the operating environment has become more challenging since 2017 driven by changing consumer preferences, more demanding retailers and cost of goods inflation. KHC is taking appropriate actions to adapt and have a healthier business model in the future. That said, we think it will take time before investors can gain confidence that there is a reliable base for organic sales and profit growth. In addition, KHC will take additional actions to shore up the balance sheet including asset sales, reduced dividends and funneling cash to reduce debt. As such, we downgrade the stock to Neutral.”

If all that weren’t enough, the food maker also disclosed it has received a subpoena from the US SEC in regards to an investigation into the company’s accounting policies, procedures, and internal control of its procurement. After launching an investigation into its procurements accounting, Kraft Heinz said it recorded a $25 million increase in its cost of products sold after determining the amount was “immaterial” to previous reporting periods.

KHC was downgraded by no less than six firms today, sending the stock tumbling nearly 27%. Ultimately, the word on the Street points to a sidelined majority on Kraft Heinz. The stock landed nine ‘hold’ ratings and one ‘sell’ rating in the last 3 months . That said, the consensus average price target points to $65.88, or nearly 90% upside potential for the stock. (See KHC’s price targets and analyst ratings on TipRanks)

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