Is Kraft Heinz Stock A Deal?

Is Kraft Heinz (KHC) stock a deal? Or is the company playing “catch-up”?

Over the past 12 months, this packaged food, condiment giant was experiencing slow-moving and even diminishing sales, increased writedowns, and a slashed dividend.

On top of all that, the Securities and Exchange Commission (SEC) was investigating the company over dubious accounting methods and late tax filings.

Coronavirus, Condiments, and Consumers

Since early 2020, consumers have been stockpiling – and not just toilet paper. Packaged foods became an easy meal for many families, and Kraft Heinz’s sales organically rose. This caused a stock rally to the tune of a 40% jump in the last year, allowing the company to increase its dividends back to 3.7% after having slashed payouts in 2019 by 36%.

Plus, the company’s coining of new names for mashups of old standby condiments was pretty clever. In fact, the company’s advertising overall is iconic.

The market has flirted with moving away from growth stocks and towards value stocks, which makes Kraft Heinz appetizing as possibly a stock on sale. But before you assume this makes for an undervalued stock, you should review some of the company’s biggest issues.

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Making the Case for Kraft Heinz…

Kraft Heinz trades at a forward-looking P/E, or price-to-earnings ratio of 14. It’s one of those classic Buffett-style stocks – the ones that you buy and hold…and hold.

Operationally, the company appears stable, thanks to its primary focus on consumer staples. This also makes it a slow-grower. But it also means the stock could be a solid investment, merely because of the company’s massive reach and classic brands.

Kraft Foods first opened its doors in 1903 in Chicago, Illinois. Heinz did so in Sharpsburg, Pennsylvania in 1869. The two companies merged into one in 2015.

This merger created a food giant with a portfolio of over 200 household names. Together, Kraft Heinz has almost 40 different products that are over 100 years old, such as Heinz Ketchup and Kraft American Cheese.

Warren Buffett became involved with the Heinz company in 2013, helping orchestrate the future Kraft merger.

…And Against Kraft Heinz

Normally, Buffett’s a good stock picker – and this isn’t to say that Kraft Heinz is a bad stock. But the company’s been facing the brunt of irregular accounting accusations as well as competition from new, healthy food brands.

In fact, the competition is so fierce that the company had to writedown more than $15 billion of its asset values in 2019. Buffett, always the wise one, admitted his mistake at a shareholder meeting – the Kraft portion of the company might not have been a wise move.

The Kraft Foods company struggled for a long time focusing on cost-cutting rather than making investments in newer products, buying brands that were growing faster, or launching newer marketing campaigns.

Today, as part of Kraft Heinz, it still sticks to a bottom-line budget strategy, continuously cost-cutting across existing business in an effort to free its cashflow. In the short term, this props up operating margins. But in the long run, it prevents the company from investing in and creating new product lines and corresponding marketing campaigns, which takes its competitive edge to the floor.

Whenever the pandemic comes to a close, consumers likely won’t be stockpiling any items as much as they currently do, and this extends to groceries. Consumers will once again become selective shoppers when it comes to food purchases. Healthy, organic, and private labels will only exacerbate the pressures this will bring.

In fact, trends like this were hurting Kraft Heinz prior to the health crisis, and it’s likely this will return once we see the end of the pandemic. Rather than offering such hefty dividends annually – to the tune of almost $2 billion – it might behoove the food icon to cut dividends and reinvest in the company’s future.

The Verdict

Buffett, through his Berkshire Hathaway (BRK.B) holdings, still owns Kraft Heinz stock. Looking back to the company’s all-time highest share price of $97, currently the stock is down about 63%. But this isn’t all bad. Kraft Heinz has multiple advantages.

Brand dominance

Kraft Heinz enjoys an economic moat. There aren’t any companies out there that have the same prowess – much less the ability to maintain it like Kraft Heinz has. Newcomers to the food manufacturing business likely won’t have the necessary resources it would take to beat Heinz at ketchup, for instance. This moat protects the company’s streams of revenue.

Kraft Heinz CEO, Miguel Patricio, expects the company to remain unscathed throughout the rest of the global health crisis and come out the other side stronger. He says the company’s size alone can tackle such upcoming challenges as inflation and potential new rivals.

The Fed expects inflation to top 4.2% by January 2022 – but Kraft Heinz claims it can produce items at scale more frugally than their closest rivals.

Analysts expected a major fallout in Q2, but Kraft Heinz sales only fell 0.5% YOY, coming in at just over $6.6 billion, and current dividend yield is 4.4%.

Versatility

Kraft Heinz has committed to elevating its product footprint throughout current and emerging markets.

Along with its present foray into flavor “mashups” – flavors that you were probably already making at home, now in a convenient, aptly named bottle – to partnering with other companies. For instance, Kraft Heinz recently agreed to buy the Brazilian company, Hemmer.

This is a move that will offer extended flavor options throughout Brazil, while diversifying the company’s portfolio of products. Plus, it’s a win/win for all involved – Hemmer gets access to Kraft Heinz distribution channels, marketing model, and Brazilian foodservice channel. Kraft Heinz can accelerate its growth in the condiment and sauce categories in Brazil.

Is Kraft Heinz Stock a Deal – The Bottom Line

Analysts at Goldman Sachs, for instance, lean towards stocks that have good profit margins coupled with stable revenue over the long term.

Stocks that fit this bill are ones like Tesla (TSLA), Uber (UBER), and Netflix (NFLX). Short term “ralliers” like eBay (EBAY), Cigna (CI), and Kraft Heinz (KHC) might not fare well in the long run according to Goldman Sachs.

Kraft Heinz is a company that has good profit margins and stable revenue in the short term but may suffer long-term through lack of innovation. It’s a ship that moves slowly against the startups catering to consumer tastes that move more like speedboats.

Still, if rates were to rise, Kraft Heinz is among the stocks that could outperform. Equities are beholden to interest rates. The speed at which interest rates change, and why they change, are paramount. 

Is Kraft Heinz stock a deal? Follow Buffett’s lead – buy and hold…and hold. 

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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.