Kraft Heinz Gets Downgrade as Rising Commodity Costs Loom — Financial Times’ Money Media

The Kraft Heinz Company’s current ability to generate ample revenue growth may not be enough to strongly offset rising commodity costs the company will face, a Wall Street firm said.

Piper Sandler downgraded the company, which owns Kraft and Oscar Mayer brands, to neutral from overweight in a research note, citing the commodity cost inflation that has swept the consumer goods industry. While the lasting effects of rising costs remain unclear, the firm said, Kraft Heinz lags its competitors in pricing power necessary to keep up sales momentum in such an environment.

“We continue to believe that KHC is better positioned to drive organic revenue growth than it has been in recent years,” Piper Sandler Senior Research Analyst Michael Lavery wrote. “However, with a 44% increase in its share price since late September, coupled with broad surges in commodity cost inflation, we now consider the risk/reward to be unattractive near-term.”

Kraft Heinz in its fourth quarter earnings results in February acknowledged inflationary pressures in non-key commodities, U.S. transportation and packaging, but not in the prices of its four biggest commodities. The company also had plans to deal with the costs, it said.

“The type of inflation that we're seeing and the level that we are seeing, we believe is manageable through not only the supply chain initiatives that we have, but also with the revenue management initiatives that we were describing,” Kraft Heinz Chief Financial Officer Paulo Basilio said on an analyst call in February.

Kraft will report its first quarter results on Thursday.

“KHC’s commodity ‘basket’ faces less pressure than those of some of its peers, but it still faces meaningful cost headwinds,” Piper Sandler said. The firm noted that prices have risen significantly over the past year for many relevant commodities, including 60% for soybeans, 150% for steel and 70% for diesel.

Assuming costs increases remain, Piper Sandler estimated they could pose a risk to Kraft’s earnings per share of 14 to 24 cents in both of the next two years, including offsets from productivity increases.

Raising prices, a go-to strategy for many companies in inflationary periods, will help Kraft, but will have downsides, Lavery wrote.

“Pricing power matters, and we estimate that further pricing would come with a potentially meaningful hit to volumes (not yet included in our estimates),” he said.

Kraft trails its peers in pricing power, according to Piper Sandler’s research, at a time when food companies with the greatest strength in pricing will fare best. By analyzing factors such as brand spend, gross margins and price elasticity of demand in certain CPGs, the firm found that Hershey and Mondelez had the greatest capability to raise prices without upsetting demand.