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What’s behind Goldman Sachs’s Kraft Heinz Downgrade

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Yesterday, Goldman Sachs downgraded Kraft Heinz (KHC) stock to “sell” from “neutral,” but maintained its price target at $29. The investment bank thinks Kraft Heinz stock’s rally after the company’s third-quarter earnings beat is close to finished.

The stock fell nearly 6% yesterday after the downgrade. Since Kraft Heinz’s earnings beat on October 31, its stock had risen about 17%.

We agree with Goldman Sachs, and think the company’s revenue and earnings could be muted in the short term, limiting its stock. KHC’s recovery could be an opportunity to book profits or exit positions.

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What could pressure Kraft Heinz stock?

In the third quarter, Kraft Heinz beat Wall Street’s earnings forecast, but its revenue, margins, and EPS continued to decline. We expect lower volumes, competition, and adverse currency rates to continue slowing its top-line growth. Its margins could remain subdued, reflecting cost pressure and soft sales, and its adjusted EPS could continue to fall due to its narrower margins and interest expenses.

Analysts expect KHC’s revenue to continue to decline in the fourth quarter. They don’t foresee its revenue returning to growth until next year’s first half. Wall Street expects KHC’s adjusted EPS to fall by a double-digit percentage in the fourth quarter, but then rise by high-single-digit percentage in the first half of 2020.

Analysts’ recommendations and outlook for KHC stock

Until Kraft Heinz’s sales and earnings stabilize, its stock may not recover. Given the company’s near-term challenges, 13 of the 19 analysts covering KHC suggest “hold,” and five suggest “sell.” Just one analyst suggests “buy.” Their average price target of $31.14 for KHC was roughly on par with its closing price yesterday.

Despite its recent uptrend, Kraft Heinz stock has underperformed broader markets. Year-to-date, KHC stock is down about 28%, while the S&P 500 is up 23.5%.

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