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UBS analyst Cody Ross downgraded Kellogg (NYSE:K) to ‘Neutral’ from ‘Buy’ with a $74.00 per share price target, down from the prior $81.00.
While the analyst acknowledges a strong YTD move in Kellogg shares, he also notes “a significant amount of inflation” that the company is facing. Ross believes Kellogg will have difficulties passing through elevated costs onto its consumers, given “MT’s/TGT’s/KR’s recent commentary to keep costs down in food and beverage categories.”
“K is on track to register 9% price/mix growth in 2022, its highest in more than a decade. However, this is partially aided by the company’s decision to pull back on promotions (1.4% more than the market). As a result, its price gaps to private label are increasing in eight of its top 10 categories, leading to volume share declines (to Private Label) in six. Ultimately, we believe Private Label volume trends will dictate the durability of packaged food companies’ pricing power, and we are concerned that cracks are beginning to form for K,” Ross told clients in a note.
The analyst believes the current Street estimates are “too high,” hence he cut 23E EPS estimates to -2% below consensus.
Net-net, Ross concludes by saying “the investment case is more murky today,” hence he moves to ‘Neutral’.
