BMO Downgrades Whole Foods And Bristol-Myers Squibb To Start Week: Why?

• Whole Foods Market, Inc. WFM shares have lost 12 percent since December 28, while shares of Bristol-Myers Squibb Co BMY are down 7 percent.
• BMO Capital Markets analysts downgraded the ratings and reduced the price targets of both companies.
• While Whole Foods’ premium valuation may continue to contract, Bristol-Myers’ risk-reward appears balanced, the analysts stated.

Whole Foods Market

Analyst Kelly Bania downgraded the rating for the company to Underperform, while reducing the price target from $26 to $23. Whole Foods’ valuation remains ahead of its peers as well as the S&P 500. There is risk of comps remaining “weak and volatile” owning to ongoing competitive pressures.

“Our Dirty Dozen Survey has not captured any signs of progress in improving WFM’s price perception despite WFM’s efforts in recent years, which we believe have been focused primarily on conventional produce prices in 4-5 key markets,” Bania wrote.

Comps may not reaccelerate in 2016 in the absence of more aggressive pricing actions, which indicates the likelihood of greater-than-expected GM pressure. Whole Foods may need to increase the pace of price investments and also broaden price investments into other categories, like organics.

The company may be expecting to maintain higher pricing by “better conveying its message of high quality organics at Whole Foods.” Bania added, however, that merely 24 percent of the Dirty Dozen survey respondents believe Whole Foods’ organic products are of higher quality than those at conventional supermarkets.

Bristol-Myers Squibb

Analyst Alex Arfaei downgraded the rating for the company from Outperform to Market Perform, while reducing the price target from $74 to $70. He wrote, “Our bullish BMY thesis has mostly materialized.” The major clinical catalysts for Opdivo have mostly played out and Street expectations have risen.

Arfaei expects Bristol-Myers to report healthy 4Q15 results, in-line or marginally ahead of estimates, particularly for the Immuno Oncology [IO] franchise. He added, however, that there aren’t many opportunities for the company to significantly beat the 2016-2018 consensus, despite Opdivo’s robust performance. Therefore, the 2016 guidance is likely be in-line with consensus.

“A bullish thesis here requires confidence in Bristol’s long-term leadership in IO, above current expectations, and at this point we don’t have enough information to make that argument,” the analyst mentioned. On the contrary, other IO competitors could narrow the gap with several agents entering the clinic in 2016. The longer-term Opdivo forecasts have, thus, been lowered.

With the weakening of some of the supporting franchises, Bristol-Myers may become more dependent on IO, Arfaei commented.