Kraft Heinz: Early And Bullish

Nov. 08, 2019 11:15 AM ETThe Kraft Heinz Company (KHC)12 Comments15 Likes


  • Kraft Heinz beat low earnings expectations for the 3rd Quarter.
  • Currency translations had a negative impact on earnings.
  • Kraft Heinz looks poised to continue building from this new level.
  • This idea was discussed in more depth with members of my private investing community, The Lead-Lag Report. Get started today »

The best way to predict your future is to create it.

– Abraham Lincoln

Kraft Heinz (NASDAQ:KHC) is digging its way out of the bottom of the Consumer Staple barrel one inch at a time. As a follow up to my bullish article on Kraft Heinz dated October 20, I still see a positive future for the stock. With a 19% gain from Oct 21 through November 6, there is a lot of good news built into the price, but from a technical and fundamental standpoint I see the stock maintaining this new base and rising from here.

KHC released earning on October 31, and the stock popped 13% in the day. Their earnings were nothing impressive, but expectations were set so low that they beat earnings estimates across the board. Net sales for 3rd quarter were $6.08 billion which is a 1.1% drop in organic sales, but this beat expectations of a 1.6% drop. Adjusted EPS decreased 9% from a year ago at $0.69, but again beat expectations of $0.54. These ultralow hurdles have bought KHC some time to show a turnaround. They divested of a Canadian cheese business this quarter and need to start looking at all their product lines to only focus on the core business units that will be profitable.

“While our third-quarter results remained below our potential, we showed sequential improvement versus the first half, and I believe we are beginning to operate the business better,” recently appointed CEO Miguel Patricio said in a statement. We are making good progress in identifying and addressing the root causes of past performance, as well as setting our strategic direction. The fact that Patricio acknowledged KHC’s results were not spectacular and didn’t try to sugar-coat them is a good sign for investors. Patricio’s plan for the future will determine how well Kraft Heinz does. He has a plan for 9 transformational projects including 5 that focus on top line growth. The future of KHC really depends on Patricio’s team making changes to the product line-up that give consumers what they want.

There was strong growth in emerging businesses such as Brazil and China and in condiments and nuts in general.

One of the most bullish signs is that Kraft Heinz maintained their $0.40 dividend, payable November 15. This would have been the chance to cut the dividend based on all the changes they are making for the future of the business. The fact that they retained the dividend at the current level shows management’s belief in the future of the company.

One of the largest hindrances to showing positive earnings growth has been the effect of currency. In the EMEA region, net sales were down 3.5% but this was due to a 3.9% negative effect of currency translation. So, on an organic basis, net sales increase 0.4%. This currency impact will be less prevalent as the U.S. dollar weakens. U.S. Dollar expectations from our Lead-Lag report this week were, “the dollar declined again continuing a trend that’s been persisting for nearly two months. The fact that the dollar is reacting in this manner signals to me that the year-long rally is running out of steam and could be pointing to an environment for international equity outperformance from here. A weaker U.S. dollar is out of KHC’s control, but as investors we will benefit from this expected direction.

From a technical standpoint, KHC’s 50-day moving average is pointed upward and its price is trading above this average which is a bullish signal. The stock has outperformed the market over the last 50 trading days when compared to the S&P 500. With an RSI of 80.2 it is in a short-term overbought condition. Over the last 50 trading sessions, there has been more volume on up days than on down days indicating that KHC is under accumulation, which is a bullish condition. This validates the strong technical condition for KHC.

Any short-term pullback in the overall market that leads to a slide in KHC’s price should be seen as a buying opportunity. This company knows it needs to change and acknowledging there are problems to be fixed is a positive influence for the future. With a weaker dollar, KHC should benefit from currency translation compared to last quarter.


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This article was written by

Michael A. Gayed, CFA profile picture
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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.

Additional disclosure: This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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