Goldman Adds Kraft Heinz To Conviction List, Upgrades Kellogg: Why?

Goldman Sachs’ Jason English said that broader Staples sector is currently trading at a premium of more than 35 percent to the SPX, and there is downside risk at these valuation levels. Within Staples, Food shares are also expensive relative to history.

While Food companies are still witnessing demand headwinds, these are no longer worsening. Moreover, the earnings outlook is “relatively healthy,” analyst Jason English said. Some companies are able to boost margins with improved price discipline and productivity.

Kraft Heinz

English added Kraft Heinz Co KHC to the Americas Conviction list, since he expects there to be positive estimate revisions. He believes the Street is underestimating Kraft Heinz’s earnings power, as the company is exhibiting improved pricing discipline and cost efficiency.

The analyst added that the company is expected to pursue its international revenue synergy opportunity with Kraft brands in 2H16, and the international expansion opportunity could surpass $1 bn in revenue over time.

The price target is at $89. The FY17 and FY18 EPS estimates are higher than the consensus expectations by 7 percent and 8 percent, respectively. Regarding M&A, English believes that a potential opportunity would accelerate the positive estimate revision cycle.

Kellogg

Goldman Sachs upgraded the rating for Kellogg Company K from Sell to Neutral, while raising the price target from $67 to $80.

The company would be able to achieve margin expansion with a significant improvement in the profitability of its core business, the analyst said. He added, however, that management was focusing on top-line growth and diversification rather than on the full margin opportunity.

“While top-line trends have improved of late, this has come at the expense of margins, as K achieved a new all-time-low trough last year despite an 18% reduction in advertising spend…K is a now operating off a very low base which, when combined with targeted productivity of nearly 11% of 2015 sales over the next three years, should result in margin recovery and associated EPS acceleration,” English commented.