WBA and KHC Stocks Cost Investors despite Recovery

  • WBA and KHC stocks have underperformed broader markets, costing investors. Warren Buffett’s Berkshire Hathaway has suffered for being Kraft Heinz’s biggest shareholder.
  • The stocks’ low valuation may be for a good reason.

Kraft Heinz (KHC) and Walgreens Boots Alliance (WBA) stocks have recovered this month, by about 15% and 9%, respectively. However, they have underperformed broader markets and peers and significantly eroded investors’ wealth, including Warren Buffett’s. This year, Kraft Heinz and Walgreens stock are down 32.0% and 18.1%, while the S&P 500 has risen 20.0%.

Buffett’s Berkshire Hathaway has lagged behind broader markets. One reason may be its investment in Kraft Heinz—Berkshire Hathaway is its largest stakeholder.

While industry-wide reimbursement pressure has hurt Walgreens, Kraft Heinz has struggled to boost its sales and margins. WBA’s and KHC’s stock prices may not fall much further, but their upside may also be limited. This year, we expect Walgreens’s top-line growth to stay low and its bottom line to fall. Meanwhile, we expect Kraft Heinz to continue to struggle on the sales and margins front.

Analysts change views

Walgreens’s and Kraft Heinz’s weak financial performance has led analysts to change their views on both stocks, prompting several downgrades. On January 16, 67% of the analysts covering KHC stock suggested “buy,” 14% suggested “hold,” and 19% suggested “sell.” Today, those proportions stand at 5%, 74%, and 21%, respectively.

As for Walgreens stock, 30%, 59%, and 11% of analysts recommended “buy,” “hold,” and “sell,” respectively, in January. Those figures are now at 8%, 75%, and 17%.

What Wall Street projects for WBA and KHC

Analysts’ estimates for Walgreens and Kraft Heinz imply they think the sales and margin headwinds are here to stay. They expect Walgreens’s revenue to grow by a low-single-digit percentage in the next few quarters, and for its bottom line to fall by a mid-single-digit percentage in the fourth quarter. They expect Walgreens’ adjusted EPS to stay low in next year’s first half.

Analysts also expect Kraft Heinz’s weakness to persist. The company’s sales fell 5% in this year’s first half.

Wall Street expects Kraft Heinz’s top line to fall 3.5% in the third quarter and 2.5% in the fourth quarter. Analysts expect its revenue to fall by a low single-digit percentage in the first half of 2020.

They expect Kraft Heinz’s EPS decline to accelerate to 31% in the third quarter, and for its EPS to fall 25% in the fourth quarter. Analysts forecast its bottom line falling by a high-single-digit percentage in next year’s first half. Its adjusted EPS fell 24% in this year’s first half, and its adjusted EBITDA fell 19.3%.

Where KHC and WBA stock could be headed

KHC and WBA stocks are both at a multiyear low valuation and offer high dividend yields. KHC stock trades at 11.7 times its forward EPS, about 41% lower than its historical average of 20x. Its dividend yield is 5.5%. As for Walgreens, its stock trades at 9.5 times its forward EPS, nearly 38% lower than its historical average of 15.2x. Walgreens stock offers a dividend yield of 3.3%.

These stocks have a low valuation for a reason, and we expect near-term challenges to continue to limit their upside. Analysts’ target price of $28.39 for KHC implies a downside of about 3% based on its September 13 closing price of $29.25. Meanwhile, their target of $57.10 for WBA implies a minor upside of 2% based on its closing price of $55.99 on Friday.