2023-10-10 02:57:08 ET
Summary
- Kraft Heinz has experienced a significant decline in stock value over the past decade.
- The company's top line and earnings have been trending downward for the past five years.
- Kraft Heinz faces challenges, such as competition, debt burden, and potential disruptions in the supply chain, making it a risky investment.
The Kraft Heinz Company ( KHC ) ranks among the top twenty largest consumer staple companies globally and represents one of Warren Buffett's major investments . Despite its iconic portfolio of beloved brands, the company has faced challenges, experiencing a decline in sales volume amidst increased competition, pricing inflation and changing consumer habits. Moreover, it has grappled with financial difficulties since the significant loss of business value and investor confidence in 2019 . Unfortunately, there has been no discernible upturn in its financial performance or stock price. Year to date, the stock has depreciated by 21.46%, and when examining its performance over the past decade, investors have incurred a substantial loss of 40.22% in value.
Ten year stock trend (SeekingAlpha.com)
Consumer staples are often sought as defensive investments as they have consistent performance irrespective of the market. However, it's important to note that historically, this stock and its dividend have not lived up to expectations. As a result, the relatively low price point and forward price-to-earnings ratio of 11.05 may not be enticing. Given these factors, I am inclined to suggest that there are more promising investment alternatives available, and I would recommend a "hold" rating for this stock.
Company overview
Kraft Heinz, a global food and beverage powerhouse, boasts a stable of iconic brands, including Kraft, Heinz, Oscar Mayer, Planters, Philadelphia, and Maxwell House. It operates within two primary segments: U.S. and International. Its core business strategy revolves around the production and distribution of an extensive array of consumer products accessible through diverse retail outlets, encompassing grocery stores, convenience stores, and online platforms.
Business model (Finance.Yahoo.com)
In March 2015 , it made headlines when 3G and Berkshire Hathaway came together to acquire Kraft Foods, merging it with H.J. Heinz to form the third-largest food company in North America at an estimated cost of around $49 billion. This union was marked by an intense focus on cost-cutting, leading some to believe that the company lost sight of creating products that resonated with consumers. Compared to competitors like Kellogg and Unilever, Kraft Heinz allocated relatively little to research and development and fell behind in adapting to changing consumer preferences, particularly the demand for healthier and organic options.
February 2019 marked a dark period for the company, with its shares plummeting by more than 60%, and an announcement that annual profits would fall well short of expectations. To the disappointment of investors, 3G reduced Kraft Heinz's dividend payments and took a substantial $15.4 billion write-down on its flagship brands, Kraft and Oscar Mayer.
Growth in innovative products (Foodbusinessnews.net)
Despite a sales boost during the pandemic, Kraft Heinz faces an innovation deficit due to years of cost-cutting. While they aim to generate $2 billion in additional sales by 2027 through innovation, the impact remains uncertain. The company is also in a leadership transition, with Carlos Abrams-Rivera taking over on January 1 from Miguel Patricio, who led Kraft Heinz since 2019.
Financials and valuation
Over the past five years, the company's revenue has displayed a relatively stable trajectory. The TTM revenues currently stand at $27 billion, marking a slight uptick from FY2022, potentially influenced by the prevailing inflationary trends.
Annual revenue (SeekingAlpha.com)
The company has shown positive signs in terms of net income, with a consistent upward trend over the past three years. Currently, the TTM net income stands at an impressive $3.16 billion, surpassing the figures from FY 2022. This demonstrates the company's financial resilience and improving profitability.
Annual net income (SeekingAlpha.com)
When examining the balance sheet, it's evident that Kraft Heinz has been actively reducing its total debt on an annual basis for the past five years. This reduction in debt levels is particularly significant considering the company's substantial merger-related debts . In 2018, Kraft Heinz carried a total debt burden of $30.8 billion, which has steadily decreased to $20.0 billion in the most recent quarter. Additionally, the company's positive Levered free cash flow of $2.25 billion over the trailing twelve months is a promising indicator. This cash flow can be strategically utilised to pay down debts, provide returns to investors, or reinvest in the business, contributing to the overall financial health and flexibility of Kraft Heinz.
Annual debt (SeekingAlpha.com) Debt and leverage (Moneymasters.app)
Kraft Heinz currently offers a quarterly dividend with a yield of 4.95%. However, it's important to note that in early 2019, the company made a significant 36% reduction in its dividend payout. Furthermore, the dividend has not displayed consistent growth over the past five years. One notable aspect to consider is the relatively high payout ratio, as approximately 54.24% of the company's earnings are allocated for distribution as dividends. This suggests that a significant portion of its earnings is being paid out to shareholders, which may impact the company's ability to reinvest in its operations or address other financial priorities.
Dividend summary (SeekingAlpha.com)
Kraft Heinz is currently trading below its average price target of $40.90, as indicated by Wall Street analysts who have assigned the stock a Buy rating with a rating score of 3.68. The stock presents an appealing forward price-to-earnings (P/E) ratio of 11.05, which is favourable in comparison to its industry peers. Additionally, it boasts a low price-to-book (P/B) ratio of 0.79, implying that investors are acquiring shares at a price lower than the company's book value. However, it's essential to consider the historical performance of the stock. Over the past decade, Kraft Heinz has been the least rewarding among its peers to hold, with investors experiencing a substantial loss of 38.80% in value. This historical performance should be a significant factor in any investment decision, despite the attractive valuation metrics and Wall Street ratings.
Price return versus peers (SeekingAlpha.com) Relative peer valuation (SeekingAlpha.com)
In addition, it's worth noting that the company has exhibited weaker top-line growth over the past three years. Furthermore, its earnings have declined during the same period when compared to its industry peers. These trends suggest some challenges in revenue generation and profitability that potential investors should take into account when evaluating the stock.
Growth relative to peers (SeekingAlpha.com)
Risk
Kraft Heinz has a history marked by inconsistency and a downward trajectory. One core issue is its reliance on mature and slow-growing product categories, constraining its potential for substantial revenue growth. It faces robust competition from both traditional industry players and emerging brands catering to evolving consumer preferences, especially in healthier and organic segments. A sizeable debt load threatens financial flexibility and increases interest expenses. Economic downturns, inflation, and supply chain disruptions pose additional challenges. Furthermore, shifts in consumer behaviour and regulations could significantly impact its product lineup and profitability.
Final thoughts
In conclusion, while Kraft Heinz may initially seem appealing with its high-yield dividend and current low trading price, which falls significantly below the average price target, caution is warranted. Despite some minor improvements in the trailing twelve months, likely influenced by inflation, the company's ability to deliver favourable returns in both the short and long term remains uncertain. This positions it as a riskier and less rewarding investment compared to industry peers. If you're seeking a defensive consumer staple stock, there seem to be more promising alternatives available. Therefore, I would recommend maintaining a "hold" rating on this stock.
For further details see:
The Kraft Heinz Company: Innovation And Reward In Short Supply