Kraft Heinz's (KHC) disappointing Q3 earnings will make management prove this was a "one-off" downturn. Analysts are divided on whether or not they can.
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."
Analysts are torn on whether the growth thesis into next year is really there.
Some on Wall Street are feeling that the stock is being unduly punished for the quarter.
"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 margin. 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.
Many more analysts cut estimates and provided a bearish outlook for the company that is seeing margins pressured in the already pressured food industry.
While not all analysts are recommending selling, eight of nine analysts publishing research on Friday trimmed their price targets for the company, per FactSet data.
"We see KHC's third quarter miss as further confirmation of our view that after years of material cutbacks in investment, and a market share shift away from branded center of store food products," Morgan Stanley analyst Dara Mohsenian wrote in a note Friday morning. "Large cap food names will need to reinvest more going forward or accept lower topline growth."
He said that this will lead to significant downside risks to the EBITDA consensus.
Still, some are caught in no man's land as the level of detail around the earnings release just doesn't cut the mustard for a firm directional take.
"Not known for copious financial detail, the particulars behind KHC's third quarter EBITDA compression were limited and it makes for scant visibility into fourth quarter and beyond," Wells Fargo analyst John Baumgartner said. "We think the risk/reward has improved but need to see more consistent execution before recommending the name."
The uncertainty is derived from management and analyst expectation for growth that is contrasted with the red flags from the quarter that suggest a sustained slide could be ahead.
"We expect 2019 EBITDA growth assuming a better top line and operating leverage but risk appears skewed to the downside with more investment," Baumgartner said. "Volatility also makes KHC hard to get behind."