A Morgan Stanley analyst has upgraded Kraft Heinz (KHC) stock to equal weight, believing the worst is behind the food giant. The upgrade follows a significant drop in the company’s share price, which the analyst now views as resulting in a reasonable valuation.
The analyst noted that while the planned separation into two publicly traded companies is expected to limit potential downside, it will also create some near-term challenges. Higher input costs are expected to put pressure on earnings-per-share growth next year.
Further complicating matters, Kraft Heinz will need to make investments in its brands to counter weak trends and structural headwinds in its North American retail operations.
Despite these challenges, the analyst believes that the planned split offers strategic advantages. The creation of two distinct entities is viewed as a positive restructuring move.
One of the new companies, tentatively named Global Taste Elevation Co., will focus on international markets and food service. This division is projected to achieve over 3% annual organic sales growth. It will house three billion-dollar brands: Kraft Mac & Cheese, Philadelphia cream cheese, and Heinz ketchup.
The second company, to be known as North American Grocery Co., will concentrate on the domestic market, competing with other major packaged food companies. This division will include three billion-dollar brands: Lunchables, Oscar Mayer, and Kraft Singles.
The analyst compared Kraft Heinz‘s restructuring to similar moves made by other companies, such as Kellogg‘s split. This suggests a broader trend of companies considering significant structural changes.
While acknowledging that Berkshire Hathaway‘s Warren Buffett expressed disapproval of the plan, the analyst remains optimistic about the long-term implications of the split.
The analyst’s shift in outlook comes after a significant one-day drop in Kraft Heinz‘s stock price, followed by a subsequent rise. The stock’s performance for the year remains positive, although below the gains seen in the broader market.
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