Geoff Considine, Ph.D | Jun 02, 2022 03:50
Shares of global food and beverage giant, Kraft Heinz (NASDAQ:KHC) have fallen more than 14% since reaching a 12-month high closing price of $44.29 on May 13.
The shares rallied early in 2022, posting a total return of consensus outlook is based on ratings and price targets from 20 analysts. The consensus rating is neutral and the consensus 12-month price target is 13.5% above the current share price.
Source: Investing.com
The consensus outlooks generated by E-Trade and Investing.com are very similar, with a neutral rating. The average of the two consensus price targets is 12.6%, for an expected 16.8% total return over the next year.
I have calculated the market-implied outlook for KHC for the 7.6-month period from now until Jan. 20, 2023, using the prices of call and put options that expire on this date. I chose to analyze options with this expiration date to provide a view through the end of the year and because the options expiring in January tend to be among the most actively traded.
The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Source: Author’s calculations using options quotes from E-Trade.
The outlook to Jan. 20, 2023, is generally symmetric, with comparable probabilities for positive and negative returns of the same magnitude, although the peak probability is slightly tilted to favor negative returns. The maximum probability outcome corresponds to a price return of -1.5%. The expected volatility calculated from this outlook is 32.3%.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).
Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.
This view shows that, aside from a small range of outcomes, the probabilities of positive and negative returns match very closely (the solid blue line and the dashed red line are almost on top of one another, other than for returns in the range of +/- 7%).
Theory suggests that the market-implied outlook will be negatively biased, relative to investors’ true expectations, because investors tend to be risk-averse and, as a result, will pay more than fair value for downside protection (put options). There is no way to measure the magnitude of this effect, however. In light of the potential for this bias, I interpret this market-implied outlook to be neutral to slightly bullish.
Kraft Heinz continues to struggle to monetize its increased scale since Kraft and Heinz merged. Current challenges from inflation and supply-chain disruptions have not helped. The company continues to execute quite well, given the challenges. Whether or not the company can build some positive earnings growth momentum remains to be seen.
For income investors, the lack of dividend growth is a negative, despite the fairly high current yield.
The Wall Street consensus outlook continues to be neutral, with a consensus 12-month price target that corresponds to an expected total return of 16.8%. As a rule of thumb for a buy rating, I want to see an expected total return that is at least half the expected volatility (32.3% annualized, in this case). KHC is right on this threshold.
The market-implied outlook for KHC is neutral, with a slight bullish tilt. While the consensus price target and the market-implied outlook suggest a slightly favorable view, Kraft Heinz’s longer-term struggles to grow earnings and the current headwinds related to inflation convince me to maintain my overall neutral rating.
***
The current market makes it harder than ever to make the right decisions. Think about the challenges:
To handle them, you need good data, effective tools to sort through the data, and insights into what it all means. You need to take emotion out of investing and focus on the fundamentals.
For that, there’s InvestingPro+, with all the professional data and tools you need to make better investing decisions. Learn More »
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.