2023-03-19 08:05:00 ET
Summary
- Kraft Heinz has made great improvements to its business with growth initiatives, cost savings and debt reduction.
- It's been rather inflation-resistant, with strong price increases that drove top and bottom-line growth.
- Recent share price weakness has made the stock attractive for income and value investors alike.
I have to admit that I’m tempted to layer capital into the financial sector, with names like Bank of America ( BAC ), KeyCorp ( KEY ), and other banks while they're trading in the dumps.
However, it’s times like these that warrant discipline and resisting the urge to go all in on any one sector. That’s why it’s worth focusing on other sectors that have also fallen by a material amount, and which are relatively immune to the banking crisis.
Such I find the case to be with Kraft Heinz ( KHC ), which as shown below, is now trading well off its 52-week high of $42+ in January, pushing its yield well above the 4% mark. Let’s explore why now may be a great time to by KHC while the market is confused about the future.
Why KHC?
Kraft Heinz is the 3 rd largest food manufacturer in North America, with iconic brands such as Oscar Mayer, Heinz Ketchup, Velveeta, and Kraft Mac & Cheese. The company has a strong presence in both developed and emerging markets, with 200+ brands and sales in 190 countries.
KHC has been no stranger to challenges, but management has made the right moves in recent years by divesting non-core businesses, while investing in core brands and improving efficiencies. This is reflected by management’s intention to realize $2 billion in efficiencies through next year. This includes $450 million in unlocked savings in 2021, and an additional $400 million in 2022.
Moreover, KHC is meaningfully growing its top line, with 10.4% YoY organic sales growth during fourth quarter. Also encouraging, KHC is stay ahead of inflation, as effective cost management helped drive adjusted EBITDA growth of 8.6% YoY during the same period. This was driven by robust price increase of 15%, which more than offset 4.8% volume decline due to supply chain disruptions and price elasticity (due to higher prices).
Looking ahead, management expects respectable organic sales growth of 4% to 6% this year. Much of this is expected to be driven by KHC’s growth platforms, which includes the Taste Elevation portfolio and Easy Meals, with the former generating $8 billion in annual sales representing 30% of total revenue. Management highlighted its plans for these two platforms for the foreseeable future as noted during the CAGNY conference a few weeks ago:
We operate in 37 countries and sell Taste Elevation in over 70 countries. Worldwide, approximately 2/3 of our Taste Elevation portfolio holds the #1 or #2 share position in the markets we serve. We see a lot of opportunity here as we expect the industry to grow approximately 25% over the next 4 years.
Easy Meals is our other priority platform with over $5 billion in net sales. It represents approximately 20% of our portfolio, with approximately 3/4 of retail sales coming from brands in #1 or #2 positions. There is also significant opportunities here, as we expect this category to grow approximately 10% over the next 4 years. Easy Meals is also less exposed to private label than the rest of portfolio.
Meanwhile, KHC maintains a strong BBB rated balance sheet and has made great strides in reducing its debt in recent years, including $1.8 billion reduction in long-term debt over the past year alone.
Notably, the recent share price weakness has pushed the dividend yield up to 4.3% and it’s well covered by a 58% payout ratio. While dividend growth has been non-existent, this has more to do with KHC’s streamlining and debt reduction efforts, which sets up the company for a better outlook in the long-run, especially in a higher interest rate environment.
Lastly, I see value in KHC at $37.63 with a forward PE of 13.8, sitting well below its normal PE of 17.2. Given the steady and growing nature of KHC’s fundamentals and the 5.6% to 7% annual EPS growth that analysts expect over the next two years, I believe KHC deserves at least a 15x PE. Analysts have an average price target of $44.50 , which could mean potentially strong double digit total annual returns over the next 12 to 24 months.
Investor Takeaway
KHC has made great progress in turning its business around, with growth initiatives, cost savings, and debt reduction. Moreover, the company has proven its resilience in a challenging market environment with strong price increases, which drove both top and bottom line growth.
Meanwhile, the recent share price weakness has pushed the stock to value territory while offering up an attractive and well-covered dividend. As such, KHC may just be an excellent value stock to buy amidst the current market turmoil.
For further details see:
Kraft Heinz: I'm Stocking Up On This Sweet Dividend Bargain