Wells Fargo drops its rating on Kroger (NYSE:KR) to Underweight from Equal Weight on its view the risk-reward profile for the COVID beneficiary stock now looks skewed to the downside.
Analyst Edward Kelly and team expect Q4 earnings to once again exceed consensus marks as Omicron extends what has arguably been the best backdrop for grocery store companies in history, but does not think the outperformance can last.
"Unionized grocery is likely to remain a very tough business long after the benefits of COVID end, we expect topline momentum to stall on the combination of Omicron re-open/end of stimulus, we see brewing risk in the set-up for product inflation, labor cost pressure looks to be increasing at an inopportune time, and management seems poised to set the bar high for 2022. KR's stock has seen strong relative performance, but the path ahead looks challenging."
Wells Fargo assigns a price target of $42, which places an average pre-COVID multiple of 12.5X on the below consensus 2022 earnings estimate. More downside is seen in the bear case scenario than upside in the bull case scenario.