Time to Buy Kraft Heinz Stock?

Persistent inflation has forced consumers to make hard decisions, and some are now searching for alternatives to brands they considered staples in the past. Inflation has also driven many companies to raise their prices to drive revenue, which can in turn serve to push more customers away.

That’s the scenario Kraft-Heinz (NASDAQ: KHC) faces. The company has missed revenue expectations for the past three quarters, partly because it has increased pricing on a number of its most popular products.

Sluggish revenue has weighed KHC down, and the stock has fallen by 9.4% over the past year.

Kraft-Heinz shares were headed toward $100 in 2017 before a series of events, including a failed bid to buy Unilever and an investigation by the SEC, which combined to send the stock plummeting to around $22 in mid-2020.

Those issues spurred the Board to find a new CEO shortly afterwards, and Kraft-Heinz has since made strides toward maximizing its product line.

Another feather in the company’s hat is that Warren Buffett has continued to hold his substantial stake through it all. Buffett’s Berkshire Hathaway owns $11.2 billion in Kraft-Heinz stock, representing 3.1% of the firm’s portfolio.

So is it time to join the Oracle?

Free Cash Flow Soars By Stunning 90%

For all of the company’s past issues, revenue remains the chief concern on investors’ minds. Kraft-Heinz reported $6.86 billion in net sales in the 4th quarter of 2023, down 7.1% year-over-year. The company cited inflation and the macroeconomic climate as chief reasons for the decline.

It also attributed the drop to the reduction in Supplemental Nutrition Assistance Program (SNAP) benefits, also known as food stamps, in the US. SNAP benefits had been increased in response to lockdowns a few years ago but were returned to normal levels in early 2023. As a result, Kraft-Heinz saw North American revenue drop 9.1% in the 4th quarter.

Revenue missed analysts’ expectations by 1.78%, but earnings fared better. Even though net income of $757 million was 14.6% lower than the same quarter of 2022, diluted earnings per share (EPS) was $0.61, which was 1.36% higher than analysts had forecast.

For the full year of 2023, Kraft-Heinz increased its top line by 0.6% from 2022. Diluted EPS of $2.31 for the year was up 20.9%, as the company increased its margins and efficiency. The all important free cash flow hit $3 billion, a 90.7% improvement from the previous year.

Management Responding to Consumer Needs

While there were some positive takeaways from the quarter, KHC fell by around 6% after the earnings release. Part of that was the continued decline in the top line, but it was also due to the company’s dismal guidance for 2024. Management forecast just 0% to 2% revenue growth in the year, and roughly 1% to 3% in earnings growth.

That forecast isn’t likely to appeal to investors who were hoping for a bigger turnaround. But Kraft-Heinz has continued to innovate, including the November announcement of a plant-based version of the company’s iconic Kraft Mac & Cheese. That was followed up by news that the company is releasing plant-based Oscar Meyer hot dogs and sausages.

The leadership team has sought to address both the blooming plant-based foods market and consumers who want healthier options in general. Another key growth segment for the company is in easy-ready meals.

To that end, Kraft-Heinz launched the Homebake 425°/:30 line of frozen meals and sides. Other new easy-to-prepare items include kits that replicate popular Taco Bell items like the Crunchwrap Supreme and Chipotle Chicken Quesadilla.

The company has also identified opportunities in the substantial snacking segment. Kraft-Heinz plans to expand its Lunchables line with fresh fruit offerings and new crisping technology that should allow customers to make a genuine grilled cheese in the microwave.

Is It a Good Time To Buy Kraft Heinz Stock?

According to 22 analysts, now is a good time to buy Kraft Heinz stock because shares can rise by 16.4% to fair value of $40.26.

It’s still unclear how much impact the new products will make, and how soon but analysts aren’t ready to call Kraft-Heinz a Sell. Indeed, 11 analysts rate KHC as a Buy currently and 2 have Outperform ratings.

The highest forecast for KHC is $45 per share, a 30.9% increase from where the stock currently trades. The average forecast is $39.44, which would represent a 14.75% improvement over the next year.

The remaining 11 analysts consider it as a Hold. The lowest forecast has Kraft-Heinz shares increasing by 1.83% to $35 over the next 12 months.

Is Kraft-Heinz Stock Undervalued?

Wall Street agrees that the stock is undervalued, if not on how much.

Kraft-Heinz stock currently has a price-to-earnings ratio (P/E) of 14.87x, which comes in lower than the P/E values for competitors General Mills and Nestle SA. It also ranks lower than PepsiCo and Coca-Cola, which both have P/E values above 20.

Coke has been a perennial favorite for Warren Buffett and Kraft-Heinz, and the beverage maker shares more than that in common. Both companies pay strong dividends. KHC currently has an annual dividend yield of 4.66%, which means a $0.40 per share quarterly payout for KHC holders.

The company did decrease its dividend in 2019 but it’s remained solid ever since. Kraft-Heinz paid out $1.97 billion in dividends in 2023 and bought back $455 million in stock. The company announced its intention to buy back $3 billion in shares by the end of 2026.

Kraft-Heinz Stock Buy or Sell?

Kraft-Heinz may not have rewarded Warren Buffett for his investment just yet, but there are reasons to believe that it will. The company has made significant strides to improve its well-known stable of brands and add new offerings to meet demand.

While revenue dropped, the company hopes that inflation will ease as the year continues. It also should move on from the short-term impact of reduced SNAP benefits.

KHC is likely to face short-term volatility, but Buffett hasn’t sold because the company’s economics and brand advantages still meet his high standards. It’s a well-run company with a substantial moat created by popular brands. It pays a solid dividend and the stock is trading at a discount to the industry and to past performance.

That makes Kraft-Heinz stock an attractive proposition for long-term holders.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.