Kraft Gets a Downgrade. Blame Commodity Prices.

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Consumer products companies are dealing with higher input costs, and food prices are at the top of the list.

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Kraft Heinz stock was lower on Friday after a Piper Sandler downgrade based on concerns about how consumer staples companies will handle higher commodity prices.

Shares of Kraft Heinz (ticker: KHC) were down 1.5% to $40.36 in morning trading. The stock is up 18.2% year to date and just over 40% in the past 12 months.

Michael Lavery
cut his rating to Neutral from Overweight, but maintained his $41 price target. He wrote that while the company may be in the best position to drive organic revenue growth in years, rising commodity costs are a headwind—especially for a stock that has jumped some 44% since September.

Consumer products companies in many categories are dealing with higher input costs, which were a drag on Friday’s first-quarter results from Kimberly-Clark (KMB), and food prices have been at the top of that list. This comes at a time when transportation and labor cost are also on the rise.

Lavery hasn’t changed his estimates to account for these cost pressures, but warns that if higher input costs remain, it could put between 14 cents and 24 cents of Kraft’s per-share earnings at risk in each of the next two years—even with productivity initiatives and some protection from hedging.

Several companies are raising prices, to pass on some of those increased costs to consumers. Yet Lavery warns that further price increases—beyond what he previously modeled—could “come with a potentially meaningful hit to volumes.” So while he estimates that more pricing action could halve the risk Kraft faces from recent cost spikes, that would be ahead of the company’s pace of price moves in recent years and may weigh on sales.

Additionally, he noted that Kraft doesn’t necessarily have the same kind of pricing power as some of its peers. Using metrics like advertising as a percent of sales, gross margins and gross margin changes, and price elasticity, he estimates that Kraft lags behind the likes of Hershey (HSY),

Mondelez International

(MDLZ), and

General Mills

(GIS). For example Kraft was “last (by a wide margin) in advertising spending as a percent of sales,” even as it has been raising spending recently.

Other analysts have also been getting more cautious on the stock, despite strong earnings results in February.

Write to Teresa Rivas at [email protected]

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