JPMorgan downgrades Conagra and upgrades Hormel, as inflation fears should keep investors in many large food companies on the sidelines

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JPMorgan analysts downgraded Conagra Brands Inc. and upgraded Hormel Foods Corp., moving all of the large food companies that analysts say have “limited long-term growth potential” into the same neutral stock rating category.

“The rationale for being neutral across the board is simple: We do not see sufficient variances in longer-term prospects to warrant a confident stand in either direction,” analysts wrote in the Conagra CAG, -0.16% downgrade published Friday. JPMorgan cut its rating from overweight, and lowered its price target on Conagra to $38 from $41.

Hormel’s HRL, +1.27% price target was maintained at $42.

“Over time, this likely will change as unique opportunities emerge, but for now we see a bunch of reasonably similar stories ahead: strong top lines paired with soft gross margins,” the analysts wrote. “These names tend to work best, in our experience, when investors are fearful in general and seeking safety; it’s hard to feel safe in traditional packaged food when inflation continues to worsen.”

See: Weight gain during COVID-19, especially among younger consumers, is driving changes in the way Americans eat and dress

Conagra reported a sales decline in the fiscal first quarter, but beat analyst expectations.

Hormel was upgraded from underweight based on valuation, the Planters acquisition, and “turkey fundamentals.” Hormel bought the Planters nut brand from Kraft Heinz Co. KHC, -0.38% in a $3.35 billion deal announced earlier this year.

Turkey brand Jennie-O is also part of the Hormel portfolio. Over the past few years, the company has faced headwinds from oversupply, competition in ground turkey, COVID-19 and feed cost inflation.

JPMorgan says the cost for whole birds, which is part of the Jennie-O lineup, is strong and will likely be reflected in fiscal 2022 results.

JPMorgan is more upbeat on Kraft Heinz and Kellogg Co. K, -0.52% in this large-cap food producer category, though Kellogg workers are now on strike and there could be more labor issues ahead for the category.

Also: Kellogg’s U.S. cereal plant workers go on strike

On the other hand, JPMorgan is bullish on food producers that it says have more sales potential, like Lamb Weston Holdings Inc. LW, -1.91%, which reported an earnings miss and warned on gross margins Thursday, and Oatly Group AB OTLY, +0.95%, which JPMorgan upgraded to overweight from neutral. JPMorgan has a $21 price target for Oatly.

The big issue facing Conagra, and many other companies, is inflation.

“[W]e worry about [cost of goods sold] inflation worsening – not just for Conagra for but most of our companies – and that our management teams aren’t necessarily baking in enough of a cushion,” JPMorgan said.

Conagra stock has tumbled 5.8% for the year to date. Hormel shares are down 10.2%. And the benchmark S&P 500 index SPX, -0.04% has gained 17.1% for the period.