Analysts at Bernstein have upgraded the shares of Kraft Heinz (NASDAQ:KHC) Co. and J.M. Smucker Co., suggesting that the market has overreacted to the potential impact of new weight-loss drugs on the food industry. The reassessment comes as the U.S. food sector has seen significant underperformance, declining 21% year-to-date compared to a 14% gain in the S&P 500.
Kraft Heinz, known for protein-rich brands such as Oscar Mayer and Jell-O, received an upgrade to outperform with a new price target set at $40, signaling confidence in its resilience. Similarly, J.M. Smucker, which has expanded its portfolio with the acquisition of Hostess Brands (NASDAQ:TWNK), was elevated to market perform from underperform, with a price target of $119.
The sector's recent downturn followed a study by Novo Nordisk (NYSE:NVO) that highlighted cardiovascular benefits from using Wegovy, a weight-loss drug. This news prompted an additional 14% drop in food sector stocks. However, Bernstein analysts argue that the sell-off is exaggerated. They predict that even if the usage of GLP-1 drugs like Wegovy grows from 1% to 10% of U.S. adults over five years, it would only result in a 2.5% annual reduction in calorie intake.
Other companies like Mondelez International Inc (NASDAQ:MDLZ)., the maker of Oreos, and Simply Good Foods Co., known for Atkins and Quest products, are seen as less vulnerable to these concerns due to their international reach and product alignment with health trends.
Both companies' stocks have experienced declines this year, with Kraft Heinz down 18.4% and J.M. Smucker down 31.7%. The analysts conclude that the food sector presents a balanced risk-reward profile, with potential for near-term performance leaning towards improvement.
InvestingPro Insights
InvestingPro data and tips provide additional insight into the potential of both Kraft Heinz and J.M. Smucker. For Kraft Heinz, InvestingPro data shows a promising P/E Ratio of 13.82 and revenue growth of 5.22% over the last twelve months as of Q3 2023. Moreover, InvestingPro tips highlight the company's consistently increasing earnings per share and a current low earnings multiple, suggesting a potential undervaluation.
For J.M. Smucker, InvestingPro data reveals a significant EBITDA growth of 10.56% in the last twelve months as of Q1 2024. The company's commitment to shareholders is evident in the InvestingPro tips, which highlight an aggressive share buyback program and a consistent dividend payment record for 53 consecutive years.
These insights further support Bernstein's positive reassessment of both companies. With additional tips and data available on InvestingPro, investors can gain a more comprehensive understanding of these companies' potential.
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