Shares of Kraft Heinz (KHC) are slipping after Piper Jaffray analyst Michael Lavery downgraded the stock to Underweight, a sell-equivalent rating, as he believes 2020 earnings per share expectations are likely "too high," as the company plans divestures of underperforming businesses.
SELL KRAFT HEINZ: In a research note to investors, Piper Jaffray's Lavery downgraded Kraft Heinz to Underweight from Neutral and lowered his price target on the shares to $31 from $35. The analyst pointed out that expectations for the company's 2020 earnings are likely "too high" as it plans divestitures of underperforming businesses, which could be 20c-30c dilutive on a per share basis. While the analyst considers the CEO change to be appropriate and believes Miguel Patricio's brand focus makes him the right fit for the role, he noted that the executive has indicated that he needs to "rejuvenate" some "dusty" brands, which likely means increasing brand investments closer to peers' levels. This could weigh on earnings by another 15c-20c per share, Lavery added.
Additionally, the analyst highlighted that Kraft Heinz wants to improve its portfolio's growth and margin trajectory by exiting businesses that it considers to be ones where it has no competitive advantage. The analyst believes this is "a strategically sound approach," but also carries risks and costs for the company. While it can delever with proceeds and improve its balance sheet, it also loses the divested EBITDA, and it carries the risk of lower-than-hoped for proceeds, he contended. The analyst acknowledged that he does not know Kraft Heinz's divestiture targets, but pointed two likely non-core candidates in the U.S., namely the coffee business, with about $1.3B in U.S. retail sales but with recent declines, and its Ore-Ida potato brand.
POTENTIAL DIVESTITURES: Kraft Heinz has hired Evercore Partners to prepare a potential sale of its Ore-Ida brand, according to a report by CNBC's Lauren Hirsch on Tuesday, citing people familiar with the matter. The brand could be worth $1.5B-$2B, sources told Hirsch. Kraft Heinz would also consider a sale of its entire frozen food business, should there be significant buyer interest, she added. Likely buyers could include Conagra (CAG), Lamb Weston (LW) as well as private equity firms, sources said. Last month, Hirsch also reported that Kraft Heinz had retained Royal Bank of Canada to review strategic options for its Breakstone's sour cream and cottage cheese assets, which could be valued around $400M.
NEW CEO: Earlier this week, Kraft Heinz announced that its board has appointed Miguel Patricio as CEO effective July 1. Patricio will succeed Bernardo Hees, who will remain CEO through June 30, to ensure a seamless transition. Patricio will join the company from AB InBev (BUD). Citing Patricio, Reuters' Richa Naidu said that the executive plans to focus more on efficiency, investing in brands and growing sales organically at the packaged food company, which has been reeling from a $15.4B writedown on some of its brands. "I think the obsession for efficiency has to be much bigger than the obsession for cutting costs," Patricio said. "Cost cutting should be a priority for any company. However, you cannot cut costs every year."
PRICE ACTION: In morning trading, shares of Kraft Heinz have dropped over 1% to $32.70.