Goldman Sachs' note on the American consumer staples sector featured upgrades for Kraft Heinz (KHC) - Get Report and Valvoline (VVV) - Get Report and a downgrade for Campbell Soup (CPB) - Get Report amid a dip in commodity prices thanks to the coronavirus.
There are three catalysts ahead for the sector, according to analyst Jason English:
- Richer valuations for longer due to lower rates
- Earnings increases as oil prices drop
- Divergent stock price performances creating buying opportunities
English expects Kraft Heinz' near-term sales spike to be less than that of Campbell's due to its higher dependence on perishable products, but Kraft Heinz may see more durable benefits due to lower commodity costs.
"Both the dairy and protein complex have become more favorable than we expected, and we raise our 2020-2022 EPS estimates accordingly (+1% on average)," English wrote.
Campbell Soup, on the other hand, has already been "excessively rewarded for a transitory food at home consumption spike," according to English.
Those tailwinds are expected to transition to headwinds next year "as it anniversaries" those previous benefits.
"CPB has rerated to a 20% P/E premium to the Food group versus its three year average of a 4% discount. We expect this premium to prove as fleeting, as the nearterm demand spike for soup," English wrote.
Meanwhile, Valvoline may be best positioned to benefit from a lower cost environment, which is curious since it has also been one of the biggest laggards in Goldman's coverage universe since Feb. 19.
The firm raised Valvoline's EPS estimates for the next three years by 4%, 4%, and 2%, respectively.
Valvoline fell 0.44% to $15.80, Campbell fell 2.1% to $46.69, and Kraft Heinz rose 5.1% to $21.10 on Friday.