Morgan Stanley upgrades Kraft Heinz after split announcement, says worst is behind stock

Morgan Stanley has upgraded Kraft Heinz to Equal Weight from Underweight, raising its price target to $29 from $28, implying an 11% upside. This more constructive view follows Kraft Heinz's decision to split into two companies, which the bank sees as a potential catalyst that has led to a bottoming of the stock's valuation and will limit downside. Despite the stock's 7% decline on Tuesday and 15% year-to-date drop, partly due to Warren Buffett's expressed disappointment, Morgan Stanley believes the worst is behind KHC, presenting a more favorable risk/reward and enhancing long-term strategic flexibility for the separated entities.

Analysis

Morgan Stanley has upgraded Kraft Heinz (KHC) to Equal Weight from Underweight, raising its price target to $29 per share, which implies an 11% upside from current levels. This more constructive view is driven by KHC's decision to split into two separate companies, a move Morgan Stanley sees as a positive catalyst. The bank's analyst, Megan Clapp, notes that the previous underweight thesis has largely played out, with the stock's valuation appearing to have bottomed following a 15% year-to-date decline. Despite the stock falling 7% after the announcement, partly due to disappointment expressed by major shareholder Warren Buffett, the analyst believes the planned separation will limit downside risk and has created a more favorable risk/reward profile. The long-term rationale for the upgrade is that the split will create a higher-growth "Global Taste Elevation Co." with increased international and foodservice exposure, thereby enhancing strategic flexibility.

Key Decisions for Investors

• Investors might view the 15% year-to-date stock decline and Morgan Stanley's assessment of a valuation floor as an opportunity to re-evaluate underweight positions, as the negative sentiment may now be largely priced in.
• It is crucial to weigh the conflicting signals between the analyst's constructive long-term view on strategic flexibility and the significant negative market reaction driven by a key shareholder's disapproval, which could cause continued volatility.
• The core investment thesis now rests on the successful execution of the corporate split; therefore, investors should monitor the subsequent performance of the two new entities, particularly the growth trajectory of the 'Global Taste Elevation Co.'