Shares of food and beverage giant Kraft Heinz (KHC) slid to a post-merger low on Friday after an earnings release on Thursday night missed the mark by a whopping $0.30.
The drop of 9.73% to $50.73 is the second largest one-day slide ever recorded by the company. Kraft Heinz shares started the year at $77.02.
Management has blamed the miss on a number of non-recurring issues, including freight costs, marketing expense and supply chain problems in the Middle East.
"We continue to believe we're in a strong position to deliver organic growth for the full-year and sustain that momentum into 2019," CEO Bernardo Hees told analysts Thursday. "We also expect a much better balance of top and bottom line growth going forward."
Some on Wall Street think the stock is being unduly punished for the quarter and are accepting management's short-term squeeze story.
"Implied reaction is overdone given transitory nature of miss, top line acceleration," Deutsche Bank analyst Rob Dickerson said. "We believe the pressure could be short-lived."
Dickerson acknowledged that the reported quarter will put pressure on the stock in the near term, provoke questions about management's credibility, and raise doubts on the company's ability to stabilize margins. He simply believes those all to be short-term and shortsighted concerns.
"If the unforeseen, one-time stepped-up costs in the third quarter roll off in the fourth quarter, to which management has pointed, all while top-line growth remains strong and is fueled by volumes and not pricing," Dickerson stipulated. "We believe the implied ~20% equity valuation discount to peers should quickly dissipate, causing multiple expansion from here."
Dickerson set a $63 price target and a "Buy" rating for the stock based on his take that bluer skies are indeed ahead. The target presents a nearly 20% premium on Friday's opening price.
More Than a Pinch of Salt
Most analysts were not so sold on the rebound thesis.
"While KHC spoke of "one-offs" in three quarters, the increased spending after two years of steep cost cuts may be mostly about catching up," Susquehanna Group analyst Pablo Zuanic said. "We wonder about the real impact of increased spending in commodity-like categories like cheese, cold cuts and nuts."
Zuanic values Kraft Heinz at the bottom of the large-cap food group as a result, setting a price target of $47 and downgrading the stock from neutral to negative on the perception of persistent risks.
"We think it is premature to assume that the profit miss is entirely transitory or that it no longer needs to make additional investments," Credit Suisse analyst Robert Moskow wrote on Friday morning. "The cost of growth in general is rising and this is a company that cut back way too far on marketing and product development infrastructure."
While he did express positivity about the revenue beat for the quarter, Moskow added that margins are likely to remain under pressure as a result of overall rising freight costs and more-stringent customer delivery demands.
"We think investors should expect further margin erosion from these factors," he concluded.
Moskow assigned an underperform rating for the stock based on his analysis.
Even experts that are advising to hold shares are not suggesting any accumulation.
"Against a backdrop of mediocre top line growth and margin compression, we would not add to positions," CFRA analyst Cathy Seifert said. "We cut our 12-month target price by $7, to $56."
The one bright spot on the day may have been for shortsellers, which recorded solid gains and added to their bets.
$KHC short interest $1.47 billion, 27.73 million shares, 4.3% of float.#kraft heinz is down almost $5/share in aftermarket trading after 4th quarter EPS miss. Shorts are up $86 million in mark-to-market profit today, bringing YTD profits to $652 million pic.twitter.com/nmPkOdkf8x— Ihor Dusaniwsky (@ihors3) November 1, 2018
According to S3 Partners, which keeps real time short interest data, shorts make up just over 4% of the company's float and are barreling were registering $86 million in profit on the after-market slip. The worsening slip today only adds to that gain.
That has emboldened bearish bettors, as they have made November 16-dated $50 strike puts some of the most popular options on the market.
Shares are rising slightly post-market.