The Ratings Game: Oatly upgraded at JPMorgan on attractive valuation, but analysts say the company could miss sales expectations

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Oatly Group AB was upgraded to overweight from neutral at JPMorgan based on the company’s top-line potential, which that analysts say isn’t accurately reflected in the company’s valuation.

JPMorgan maintained its $21 price target, which implies a more-than 40% upside to current levels.

Oatly
OTLY,
+0.54%

stock was trading Friday below $15 after falling more than a third, down 37.3%, over the past three months, while the benchmark S&P 500 index SPX is up 1.9% for the period.

The company went public on May 20 after its initial public offering priced at $17 a share.

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

“Yes, there is a decent chance that sales come in a few million dollars shy of consensus this quarter, which is never a good look for a newly public growth story,” analysts wrote. “But we believe the miss would not be driven by reduced demand but rather, by the sell side not properly heeding management’s tone about the sales cadence.”

The FactSet consensus is for third-quarter sales of $186.9 million and a loss of 10 cents per share.

“We also think the risk of a 3Q revenue miss is increasingly baked into buy side expectations,” JPMorgan said.

“Lastly – and perhaps most importantly – we expect the company to reiterate its annual revenue target when it reports 3Q; if it does, the implication will be that 4Q top line estimates need to rise. So we don’t see the upcoming 3Q21 earnings release/guide as an unmitigated negative; indeed the positive impact of guidance theoretically could more than offset a modest 3Q miss.” 

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

Though JPMorgan is optimistic about Oatly, it’s more downbeat on other food producers. Analysts downgraded Conagra Brands Inc.
CAG,
-0.44%

and upgraded Hormel Foods Corp.
HRL,
+1.31%
,
putting a number of large-cap food producers at neutral.

In the Conagra downgrade note, analysts explained that they “believe strong revenue growth can overcome a number of sins, including the major one of 2021: cost inflation.”

Analysts think Oatly is well-positioned to manage this challenge.

“We also hear concerns about inflation, particularly oats, but we remind readers that Oatly can lock in many prices well in advance,” JPMorgan says.

“We would not be surprised if it bought most of its oat needs deep into 2022. Of course, oats are but a small part of Oatly’s total [cost of goods sold] basket, anyway, and we think this company has a great deal of pricing power if needed.”

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