Six downgrades for Kraft as Street bails on cratering stock: 'There is simply too much uncertainty'

Bernardo Hees, CEO, Kraft Heinz
David A. Grogan | CNBC
Bernardo Hees, CEO, Kraft Heinz

Analysts at J.P. Morgan Chase, Stifel, UBS, Barclays, Bank of America and PiperJaffray all downgraded Kraft Heinz after the company's dismal earnings report Thursday after the bell.

In addition to a miss on the top and bottom line, analysts cited Kraft Heinz's decision to slash their dividend and news that the company is the subject of an SEC investigation. Many analysts don't see things getting any better throughout 2019 as Kraft Heinz also issued a huge write-down for many of their flagship brands.

The stock opened down over 27 percent in early trading to $35.05.

'Flat, Shrunk, and Levered'

Among the downgrades, J.P. Morgan analyst Ken Goldman titled his report, "Flat, shrunk, and levered is no way to go through life." He went on to say they would have kept their overweight rating, "if we still had confidence in the company's strategy."

Stifel's Christopher Growe said, "As the conference call pressed on in the evening, the severity of the bad news seemed to only increase and we believe this will manifest itself in a very weak performance for the shares today."

"In light of its $15B write-down on its key Kraft and Oscar Mayer brands, we are not confident it can build or maintain brand equity needed to compete in today's consumer environment in a sustainable, compelling way, " said PiperJaffray's Michael Lavery in his earnings downgrade recap note.

"The magnitude of the 4Q18 miss and 2019 guidance outlook shortfall were beyond any prediction...while we recognize our downgrade to equal weight is likely not informative at this stage, there is simply too much uncertainty for us to continue to recommend the stock," wrote Barclays Andrew Lazar.

Here's what the major analysts said:

JP Morgan - Downgrading to neutral from overweight

"Flat, Shrunk, and Levered is No Way to Go Through Life..KHC had a memorable day yesterday: it a) missed 4Q18 EPS by $0.10, b) guided 2019 EBITDA ~15% below consensus (and EPS even worse), c) cut its dividend by 36%, d) took a $15B write-down on two of its most important brands, and e) announced an SEC subpoena... Despite all of these factors, we might have maintained our OW rating if we still had confidence in the company's strategy... But we are concerned that as soon as leverage comes down it will jump right back up when the next deal is completed... As the company said last night, 'Our decision… is to execute a strategy on deleveraging faster so we can better position the company for future consolidation.' We no longer see a compelling upside case and thus downgrade to Neutral..."

Stifel- Downgrading to hold from buy

"Kraft Heinz reported a barrage of bad news last night including a significant fourth quarter earnings/EBITDA miss, a weak 2019 outlook, a reduction in its dividend by roughly 1/3, an over $15 billion goodwill impairment, and a $25 million one-time charge for an SEC investigation around its procurement activities (which, while immaterial, is disappointing)... As the conference call pressed on in the evening, the severity of the bad news seemed to only increase and we believe this will manifest itself in a very weak performance for the shares today... We are downgrading the shares to Hold from Buy, removing from the Select List, and establishing a $35 target price... We expect the food stocks as a group to trade down as one of the largest companies in the industry falters and further supports the increased cost of achieving sales growth..."

PiperJaffray- Downgrading to neutral from overweight

"We have been bullish on KHC for its role as a likely consolidator in packaged food, but now believe we likely were overly optimistic in both its likelihood of getting a sizable deal done and of the quality of the growth profile for any ensuing company... In light of its $15B write-down on its key Kraft and Oscar Mayer brands, we are not confident it can build or maintain brand equity needed to compete in today's consumer environment in a sustainable, compelling way... We have been wrong in our bullish view to date but still do not expect compelling near-term upside, and we downgrade our rating from OW to Neutral..."

Barclays- Downgrading to equal weight from overweight

"Following disappointing 3Q18 results, we held onto our more positive rating on KHC for three primary reasons: 1) a belief that much of the 3Q18 EBITDA miss was the result of discrete one-time headwinds; 2) management's indication that its +$300mm step up in investment spend this year was sufficient to drive sustainable profitable growth going forward; and, 3) our belief that this incremental spend and improving consumption trends would enable year over year EBITDA growth beginning in 2019... While we were admittedly cautious on 4Q18 EBITDA as volume trends accelerated, frankly, the magnitude of the 4Q18 miss and 2019 guidance outlook shortfall were beyond any prediction... In short, while we recognize our downgrade to EW is likely not informative at this stage, there is simply too much uncertainty for us to continue to recommend the stock..."

Bank of America- Downgrading to neutral from buy

"We expect investors to question whether KHC may need to boost spending further given its still relatively low advertising base and recent volume growth stimulated by promotional spending... We also expect investors to question the value creation potential of future acquisitions now that FY19 EBITDA is trending back to FY15 levels... In our view the industry is more difficult today than it was in FY15 which is causing KHC to make material changes to the business to adapt... In the long run these changes and investments should position KHC to create a more solid foundation for growth and returns..."

UBS- Downgrading to neutral from buy

"We downgrade Kraft to Neutral as the tenets to our EBITDA recovery thesis are impaired and the company's margin baseline is now 5pp lower than 2017...In addition to its Q4 profit miss, Kraft guided FY19 EBITDA 14% below consensus, recorded a $15bn impairment charge for cheese and deli brand assets, and cut its dividend by 36%... Though Kraft plans to deliver price increases and grow sales in 2019, we are not convinced KHC can simultaneously sustain outsized volume gains and expand margin rate—evidenced by a 500bps margin rebase in 2-yrs..."