Why Kraft Heinz Stocks Could Offer You Delicious Value

In an age when virtually everything – stocks included – seems overpriced, it would be refreshing to find a real game of value, a needle in the proverbial haystack. Maybe this piece is in your pantry right now. Kraft Heinz (NASDAQ: KHC) currently offers what not all companies with over $ 40 billion in market capitalization can: a relatively low valuation, a positive earnings profile, and (like it or not) a willingness to protect its margins by practically any means necessary.


Sometimes it takes a crisis …

Compared to the various food industry’s 12-month P / E ratio of around 21 – which in itself isn’t horrible – Kraft Heinz, at around 11.8, should make shareholders feel like they’re stealing from the display.

KHC stock hasn’t always been a good deal. For a few months in 2016, Kraft Heinz rode loud and clear, trading at 34 times the company’s earnings. Stocks hit nearly $ 90 and investors were probably feeling pretty good about themselves. Kraft Heinz, recently formed as a result of a merger between HJ Heinz Company and Kraft Foods Group, had just gone from a net loss in the first half of 2015 to a sizable net profit of $ 1.67 billion in the first half of 2016. This was probably due in large part to the new mega-company eliminating 8,250 jobs, $ 568 million in severance and benefits, $ 337 million in non-cash asset costs and $ 376 million in other release costs until July 3, 2016.

But in 2018, a surprising culprit caused the stock price to drop to $ 30. This year’s annual report cites a loss in value (i.e. a generally permanent loss in the market value of an asset) after another, resulting in a mind-boggling net loss of $ 10.2 billion. Kraft Heinz’s gross profit margin also began a prolonged decline in the same year, dropping from 36% in early 2018 to 30% at the effective start of March 2020 of the Covid-19 pandemic. When a company’s gross margins start to drop like this, it could signal an increase in the cost of materials as suppliers increase commodity prices – an issue businesses will certainly face in 2021.

Reflecting on 2018 depreciation charges, Kraft Heinz Executive Vice President and then CFO David H. Knopf cited / accused revised margin expectations in Kraft natural cheese, Oscar Mayer deli meats and retail in Canada – again, suggesting it costs the company more to source materials, preventing Kraft Heinz from making a profit from every product sold . And, in an excuse / reality that should seem painfully familiar today, Knopf also blamed his company’s woes in 2018 on supply chain issues.

An inconvenient truth

Thus, the 2016 swing to profit preceded a bear market in KHC shares. Fast forward to the first three months of 2021, and Kraft Heinz just posted a net profit of $ 1.27 billion compared to a net loss of $ 676 million in the first three months of 2020. Certainly there is had a unique factor to credit for it: Kraft Heinz openly acknowledged that the Covid-19 pandemic had had a beneficial short-term financial impact on the company’s tax bottom line. Kraft Heinz also acknowledged the acceleration of the post-crisis recovery, as the company’s retail sales increased due to higher-than-expected consumer demand for the products.

So can investors confidently say, “It’s different this time”? Again, a P / E ratio of 12 from 34 in 2018, along with the significantly reduced share price, certainly looks different. Granted, Kraft Heinz’s current 32% gross profit margin is down from 36% at the start of 2018, but it is still an improvement from the 30% in March 2020. In addition, no company cannot go back and source materials today at 2018 supplier prices, in order to achieve those soft and bulky pre-pandemic margins. In addition, Kraft Heinz appears to have no qualms about passing its costs on to consumers, which may allow it to improve its profit margins in this way.

Indeed, Kraft Heinz (perhaps unfairly) became the star child of food price inflation in 2021. Undoubtedly, PR people around the world winced when CEO Miguel Patricio shockingly – or maybe honestly – told the BBC that people will have to get used to higher food prices.

Carlos Abrams-Rivera, US Zone President at Kraft Heinz, was trickier with his language. Apparently, Abrams-Rivera and his company are ready to implement a “focus on value” in the design of their brands, which may include reducing portion sizes to keep prices constant in the wake of the inflation.

Meanwhile, current CFO Paula Basillo is apparently “very confident” in Kraft Heinz’s ability to protect its margin and weather inflation. Basillo added – as if anyone doubts it – that Kraft Heinz is open to further price increases if inflation continues to rise.

Hold the cheese, please

As we’ve seen, the 2015 merger between Kraft and Heinz marked a historic transition point – and near-top for investors in the combined companies.

Clearly, Kraft Heinz CEO Miguel Patricio wants the company’s stakeholders to believe that they are now witnessing another “rapid transformation.” This time around, however, the result will actually be a smaller business.

Kraft Heinz sells its worldwide intellectual property rights to, among other brands, Cracker Barrel, Breakstone’s, Polly O and Cheez Whiz in the majority of countries outside of North America.

Does it make sense for Kraft Heinz to lose weight by selling the rights to these less lean food brands? The company is expected to earn around $ 3.2 billion in cash from the transaction, while retaining its rights to much of its junk food brand portfolio in the United States and Canada.

Considering that Kraft Heinz’s cash and cash equivalents have grown from $ 3.4 billion at the end of 2020 to $ 2.3 billion as of September 25, 2021, this may not be a bad idea for the company. company to get rid of certain brands of cheese abroad in the interest of capital accumulation. Perhaps Kraft Heinz could start paying off its $ 23 billion long-term debt – a pretty heavy burden to bear, given the company had $ 1.8 billion in free cash flow (FCF) on it. 12 months to September 25, 2021., a significant drop from the $ 2.9 billion recorded the previous year.

A Kraft-y company

It can leave a bad taste in the mouth, but Kraft Heinz is ahead of the curve in passing its costs on to consumers when needed. This unfortunate development for buyers should still inspire confidence among stakeholders.

In retrospect, the growing pains of Kraft Heinz as a massive conglomerate may have been inevitable. Half a decade after the merger, the company finally seems to recognize that sometimes less is really more.

So where does that leave potential investors now? While top-flight Kraft Heinz was humbled, the share price plummeted. But if the current earnings multiple doesn’t intrigue value investors, nothing in this inflated market will.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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