Can We Get Serious About Kraft Heinz?
Summary
- Kraft Heinz has declined rapidly after dismal Q4 2018 earnings.
- Changing consumer preferences and an SEC-issued subpoena have further added to Kraft Heinz's sell-off.
- The fundamentals of the global economy and the strategic restructuring of Kraft Heinz have catapulted the company into a prime position for sustainable future long-term growth.
Overview
Kraft Heinz (NASDAQ:KHC) has been hit hard this past week. Literally overnight, the company lost $16 billion in market capitalization value after experiencing its largest ever one-day sell-off. Shares of Kraft Heinz dived 27% to a 52-week low of $31.82 as investors rushed to sell their position in reaction to the company’s dismal fourth-quarter results.
Source: Yahoo Finance
To summarize Kraft Heinz’s results:
- $12.61 billion quarterly loss. (About $10.34 per share).
- $0.84 EPS. (Down from Avg. Analyst Estimate: $0.94 EPS).
- Increase in revenue from $6.84 bn to $6.89 bn. (Down from Avg. Analyst Estimate: $6.94 bn).
- Decrease in dividend to $0.40 quarterly per share from $0.625 quarterly per share.
Adding Salt to the Wound
Adding to the disastrous results, Kraft Heinz has acknowledged a down-trending valuation to two of its major trademarks; Kraft and Oscar Meyer, which led to more than $15 billion being written down by the food giant. The Securities and Exchange Commission has also placed the company under investigation and issued a subpoena as a result.
In the short term, it’s obvious that slashing costs to appeal to changing consumer preferences has had a deleterious effect on the company’s margins as evidenced by the adjusted EBITDA margin declining 460 basis points. Organic sales are also on the decline and expected to remain negative in Q1 2019 stemming from the shift of the Easter holiday to the second quarter of 2019 and unfavorable trade timing.
Despite this, Chief Financial Officer David Knopf stated, “While we expect to take a step backwards in 2019, we remain confident in delivering consistent profit growth from 2020 onwards, driven by fully leveraging our advantage brands, cost structures and capabilities.”
The Positive
Let’s get real, one only has to examine the fundamentals behind this stock to determine why this recent decline is a perfect opportunity for investors to swoop in for a bargain opportunity. Kraft Heinz' products are viewed by almost every one of us on a daily basis. Whether it’s front-and-center on a store shelf, on an internet advertisement in the corner of your screen, at home during a commercial between your favorite show or right on your coworker’s desk, you see it every day.
Do any of these brands look familiar to you?
Source: Kraft Heinz
The human population is rising, and with that comes an increase in food consumption. Sure, the packaged food industry has been hit with a shift in consumer preferences towards less processed, fresher, local foods. However, convenience is still king and that coupled with the affordability of these products due to the company's cost-advantages from sophisticated supply-chain management will allow the company to continue to thrive as a consumer staple among the public.
Another key demographic trend involves rising income inequality, a decrease in the affordability of housing, and the threat of a recession that speculators are convinced will occur within the next few years. Overall, this will leave consumers with less disposable income that they can use towards premium food products. Of course, ethically speaking, this is a huge problem for society and an issue that must be addressed. However, for food-giant conglomerates like Kraft Heinz, this simply represents an opportunity for the company as individuals and households with lower income are no longer to afford higher quality foods due to higher price premiums, and instead opt for cheaper, more convenient foods to sustain their lifestyle.
A key advantage Kraft Heinz has is its ability to use its current stable sources of income, assets, and infrastructure to fund future decisions that appeal to changing consumer preferences. Towards the end of 2018, the company successfully acquired paleo-focused food company Primal Nutrition for approximately $200 million after determining the acquisition would generate approximately $50 million in net sales that same year. Right before that major announcement, Kraft Heinz was coming off the fresh announcement of its acquisition of Ethical Bean Coffee, a leading roasting company comprised of 100% Fairtrade, certified organic coffee. The acquisition of these companies successfully appeals to consumers looking to advance social responsibility, global awareness, and environmental accountability.
Kraft Heinz has also expanded the potential of driving organic sales by increasing the transparency of its current line of products, using higher quality ingredients, and extending current brands. A clear example of this was the company's success in launching Just Crack An Egg, a hot breakfast made with real ingredients that can conveniently be prepared in under two minutes.
Source: Kraft Heinz
Head of Marketing at Kraft Heinz, Greg Guidotti, reinforced the company’s message of appealing to a growing health-conscious consumer base, “Up until now, there wasn’t a fresh, savory breakfast option that was fulfilling what people wanted. With existing breakfast choices, there were inherent compromises and trade-offs between convenience and freshness.”
Kraft Heinz doesn’t take brand extension lightly and believes in using high-quality, in-depth consumer research as its core foundation in building consumer awareness and loyalty. Products are professionally packaged and presented to consumers, strategically brought into market, and before you know it they are sitting at eye-level in front of you at prime shelf space at all your local stores.
“Our strategy at Kraft Heinz is to drive brand growth through consumer-led product renovations and innovations. In past years, you’ve seen us re-invigorate existing brands like Kraft Macaroni and Cheese and Oscar Mayer Hot Dogs as well as focus on big bets like last year’s O, That’s Good! This year, we’re continuing that with Just Crack An Egg,” explained Guidotti.
Overall, the diversification of the company's available line of products, the strengthening of Kraft Heinz’s current portfolio of products, and its acquisition of companies specializing in addressing consumer changes, represents a strong platform to foster stable and reliable growth going forward.
Verdict
Despite weak Q4 earnings and a plethora of media articles primarily fueled by the increase of shorts flooding frantically towards Kraft Heinz stock, the foundations of Kraft Heinz are strong, economically sound, and adapting rapidly to the new consumer. The 1-year target estimate currently stands at $39.42, but as the dust settles this stock easily has the potential of finishing the year at over $45. If you're looking for a great long-term investment, purchasing this stock is a no-brainer and a great opportunity at its current price.
Now hurry, go buy this stock while it’s cheap, your kid wants some Kraft Smooth Peanut Butter™ on their sandwich.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (90)
It will be like the famine in Ireland in the 19th century. the price of potatoes went up because it was a relatively cheap substitute for other more expensive food.
The rest are completely unknown to me.
This implies that with updated information there is yet to be a sufficient margin of safety at current prices.So have patience, wait for a lower price and then strike.
If the stock was at 1000 USD per Share, and had fallen to 500, would your write up be any different?
Tom Brady is overrated. Discuss:
However, with this type of scale, Intellectual property and branding, if they don't get it right now, the Chinese intelligence will gladly take this off the hands of the panicked and put it into their long game domination strategy to continue KRAFT for another 150 years IMHO
Blind investors reaching for yield and believing that the "Buffett factor" insured outperformance lead to a very highly inflated market price. Market prices in the seventies, eighties and nineties made little economic sense. KHC was never worth more than the fifties, and today may not even be worth that much. I got my shares in the merger transaction and got out in 2016 and back in recently at $35.