KHC - Kraft Q2 2022 Earnings: Reason To Buy For Dividend And Value

• KHC stock fell on strong volume despite posting upbeat results and a positive outlook.
• Investors are worried about rising inflationary costs.
• Investors get a 4.3% dividend yield for a stock trading at a forward P/E below 15 times.

For most of the year, Kraft Heinz ( KHC ) hovered around $35. KHC stock tried to break out above its more recent $38 before its quarterly earnings report. But on July 27, 2022, trading volume surged as the price fell, a bearish sign.

Investors do not like Kraft’s warnings on commodity and supply chain costs pressuring its quarterly results. Ever since inflationary risks intensified late last year, investors who protected their portfolios from such risks avoided losses. After Kraft shares fell, it looked like a stock that investors should have avoided. Still, Kraft’s strong report and forecast offer investors a reason to keep holding the stock. Should investors now hold Kraft shares?

Cost Pressures in Second Quarter

In the second quarter, Kraft posted non-GAAP earnings per share of 70 cents . Cash from operations fell by 61.2% Y/Y to $788 million. This is due to related taxes for its Cheese Transaction. Net sales fell modestly in North America, International, and at Kraft Heinz in the six months . For the three months ended June 25, 2022, gross profit fell by 13.4% Y/Y to $1.98 billion. Net operating more than halved by 56.2% to $542 million.

In the tables below, Kraft demonstrated an increase in all key metrics. Net sales, retail consumption, and market share are all up:

Kraft has a good price ladder for its categories. For example, it enjoys a price floor because of its Velveeta license. Its product categories include Kraft Singles, Deluxe, and private label. Its partnership with Simplot began in February 2022. It will realize higher capacity later in the year. To increase sales, it will promote that brand consistently.

Above: KHC stock fell sharply after posting Q2/2022 results.

In food services, Kraft is improving production. Its U.S. case fill rate rose steadily. It will reach the high 90% range next. Refer to the middle table below:

Club and dollar are two channels for Foodservice. Foodservice is 30% of revenue and growing at above 20% Y/Y.

To return to historically high levels, the firm needs shelf availability levels returning. It has room to grow from here. This will translate to higher efficiencies and result in expanding margins.

Kraft Heinz's Outlook

Kraft expects adjusted EBITDA to be in the range of $5.8 billion to $6 billion. 55% of that is due to the fourth quarter. This suggests Kraft will post a stronger fourth quarter compared to the third quarter.

The company expects costs to peak sometime in the remainder of the year. This would set Kraft up for profit growth acceleration in 2023. For now, investors and management are only speculating that costs peaked.

Opportunity for Investors

E-commerce grew by 18% Y/Y. However, its omnichannel communications, including mobile devices, will stimulate sales. While technology firms boast about new-age technology, Kraft is using AI insights in Kraftomatic to derive creative marketing initiatives.

Risks with KHC Stock

Chief Executive Officer Andre Maciel said that Kraft is building its inventory to leverage its cost structure . It's producing more than it can sell deliberately. If demand curves change, Kraft risks having more inventory and excess labor that it does not need. Investors will punish the stock for its unexpected costs.

Stock Score

Kraft has a weak growth score. It has a good valuation and profitability score:

Kraft’s low revenue growth is the reason for its “F” grade:

Its score is negative on all revenue and EBITDA growth metrics. By comparison, the sector median growth is positive for the above measures.

Kraft needs sustained demand as it increases inventory levels. In addition, its hedges against commodities and currency will expire early next year. If inflationary pressures persist, the company may not have strong branding strength. Pepsi ( PEP ) and Coca-Cola ( KO ) are examples of companies that have a superior product mix and brand. They may pass higher costs to customers without hurting demand.

The company may develop partnerships to support sales to minimize price increases. In Brazil, it closed a deal with Brazilian food company Hemmer . This acquisition supported Kraft’s strategy to increase its presence in emerging markets. Furthermore, Hemmer leverages Kraft Heinz’s distribution network. Kraft expanded its global reach.

Your Takeaway

Markets are not rewarding Kraft for accelerating its growth platforms. It's ignoring the value of delivering on growth efficiencies. Shareholders want the company to demonstrate that it can handle ongoing price inflation. This is a major risk factor for packaged food companies.

Kraft trades at a forward price-to-earnings ratio of below 14 times. Its dividend yields 4.3%. Investors are paid waiting for the firm to expand its profitability. Kraft’s international expansion will support its long-term revenue growth. Investors should take advantage of the stock’s weakness to build a starter position in the company.

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