By Bill Peters
UBS analysts upgraded Kraft Heinz Co. shares on Thursday, explaining that rising prices will help the company overcome declining sales volumes amid “peak inflation” in the third quarter.
The analysts expect Kraft Heinz /zigman2/quotes/203625533/composite KHC +0.63% to charge more while selling less food — potentially continuing a trend that emerged earlier this year among other big consumer goods companies like PepsiCo Inc. /zigman2/quotes/208744353/composite PEP +0.88% and Conagra Brands Inc. /zigman2/quotes/200394144/composite CAG +0.68% , which raised prices and nudged sales higher even though sales volumes remained muted.
As Kraft Heinz prepares to report third-quarter results next month, the analysts said it was showing signs of faring better than other U.S. packaged-good companies, even as it deals with rising costs for things like eggs, butter, pork belly, electricity and knots in its supply-chain. The UBS analysts upgraded Kraft Heinz to neutral from sell and maintained their $34 price target on the stock.
The analysts noted that Kraft Heinz was planning a price increase on a big chunk of their products that was set to take hold on Oct. 22. The UBS analysts said they expected price increases to contribute 6% toward sales growth in Kraft Heinz’s full-year 2023, with a 4.2% dip in sales volume.
For more: Food prices haven’t risen so steeply since 1979, with one grocery staple up nearly 40%
The analysts also said they expected Kraft Heinz’s third-quarter gross margin to be the lowest of the year “as peak inflation hits and price increases lag.” They said they expected 11.2% organic sales growth for the third quarter. But they said the higher ingredient costs would likely weigh on growth.
Earlier in the year, the analysts were concerned about the company’s ability to push profit and prices higher, as it dealt with its own rising costs. They said Kraft Heinz — which along with its namesake brands is responsible for grocery-store staples like Oscar Mayer, Velveeta and Maxwell House — had benefited earlier in the year from discounting less.
They also argued that the company “competes in categories with greater trade down risk, and has high risk to consumer trade down” — that is, the consumer shift from buying more expensive goods to cheaper goods when times get tougher. But with the stock trading in the $33 range, the analysts said they felt the market “appreciates” those inflation and competition-related risks. However, they said they believed that rising prices are one of the biggest variables for the company’s path forward next year.
Read: Beer, hair cuts, tools and pet food — inflation has spread everywhere
For the third quarter, the analysts said trends had improved Kraft Heinz, or at least weren’t as bad as some of its rivals.
“Our confidence is underpinned by strong consumption trends in Nielsen tracked channels as KHC’ sales continued to accelerate this quarter relative to prior quarters,” the analysts wrote. “In addition, we highlight KHC continues to lose both dollar share and volume share in the latest 12-wk period; however, KHC’s share loss has moderated compared with the last 52 weeks and is less than our U.S. Packaged Food coverage averages.”
Shares of Kraft Heinz slipped 0.5% on Thursday. Year-to-date, they’re down around 7%. By comparison, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.75% has slid 24% so far this year.