Pros and Cons of Investing in Kraft Heinz

The Kraft Heinz Company (NASDAQ: KHC) once earned the attention of Warren Buffett, but later he admitted that it was among his worst investing decisions on a key dimension, price.

The company itself, which manufactures and sells a wide variety of food and drink items, is a staple in many portfolios thanks to constant demand among end consumers. But on price, Buffett on reflection believes he paid too much for the producer of condiments, sauces, cheese, dairy goods, meals, meats, drinks, and coffee,

That was a decade or so ago, though, so now with net sales of about $27 billion in 2023, is Kraft Heinz finally a good deal?

Kraft Heinz Isn’t Resting On its Laurels

For a company that specializes in everyday items, it’s easy for investors to get lulled into thinking that there’s not much innovation going on. But that’s not entirely true. Yes, Kraft Heinz is a bread and butter type of stock play but it’s also coming up with new ideas to grow the top line. For example, by launching pancake-inspired IHOP® syrups across the U.S.

Given the popularity of syrups in the US, it’s no surprise to see Kraft Heinz management launch flavors like Original and Butter Pecan in stores in an effort to replicate the IHOP dining experience at home.

In the US IHOP pancakes are a well-known restaurant chain that sells over 400 million pancakes every year, and the partnership is designed to help Kraft Heinz make homemade breakfasts more accessible to consumers and ultimately build brand loyalty.

Another way the company is branching out is via partnerships, such as with Nintendo Co., Ltd. (OTC:NTDOY) to create KRAFT Mac & Cheese Super Mario Power-Up Shapes, a new product creation. To attract a younger audience, it’s also adding Super Mario elements like Fire Flower, Super Star, and Super Mushroom to the macaroni shapes.

The obvious play here is for Kraft Heinz to strengthen its market position and connection with consumers across various demographics in a bid to turnaround the share price that has generally been trending lower over the past 3 years.

How Are Kraft Heinz’s Financials?

Kraft Heinz shared quarterly results that largely matched analysts expectations. Management reported growth in Global Away From Home, Emerging Markets, and North America Retail ACCELERATE Platforms. 

In the three months that ended on March 30, 2024, Kraft Heinz’s adjusted gross profit went up by 3.8% compared to the year prior to reach $2.21 billion. Adjusted operating income also grew by 1.6% from the previous year, reaching $1.27 billion.

Adjusted net income showed modest year-over-year growth, coming in at $847 million, while adjusted EPS also increased by 1.5% to $0.69 per share.

Nonetheless, the company hit some bumps in the road with a 1.2% drop in net sales year-over-year to $6.41 billion. Cash outflows from investing activities increased by 8.7% year-over-year to total $287 million.

Kraft Heinz has long been a household name, known for its iconic brands like Heinz Ketchup, Kraft Mac & Cheese, and Oscar Mayer but the company’s financial journey has been less straightforward in recent years, marked by volatility in its stock price, changes in leadership, and strategic pivots aimed at reinvigorating growth. So now the billion dollar question is what comes next?

What Does The Future Hold For Kraft Heinz?

Rising input costs, supply chain disruptions, and shifts in consumer behavior have all proven to be headwinds in recent years that have anchored the share price but it appears some signs of optimism lie on the horizon.

In its most recent earnings call, management stated that they anticipate organic net sales growth of 4-6% for the fiscal year, driven by price increases to offset inflationary pressures and a modest recovery in demand for its products.

The top brass has been focused on “Gross Margin Accretive” innovation, which broadly translates to introducing new products or reformulating existing ones in ways that increase profitability.

Kraft Heinz expects adjusted EBITDA to be between $6.6 billion and $6.8 billion as cost efforts take hold and efficiencies yield better margins.

The leadership team is also betting on growth in emerging markets, especially in Latin America and Asia, where it sees significant opportunities to broaden its footprint. 

Is Kraft Heinz Profitable?

It’s been a tumultuous few years for Kraft Heinz as it relates to profitability. When the company faced a $15.4 billion write-down on its Kraft and Oscar Mayer brands, the reaction of investors was sell with abandon, leading to a sharp decline in stock value and a need for a strategy reset internally.

More recently, the company has emerged financially to produce seeds of profitability. In the most recent quarter, the net income of $927 million was reported, up from $899 million in the same period a year ago. Largely, this was attributed to price hikes across its product portfolio and cost-cutting measures. Earnings per share came in at $0.72, beating analysts’ expectations by a small margin.

The gross margin still leaves a little to be desired, given that it stands at around 32%, a relatively low figure compared to its peers in the food and beverage industry, and suggestive of ongoing cost pressures.

The debt load has been reduced somewhat however, though remains at approximately $20 billion, which limits its financial flexibility.

On the positive side, cash flows are strong at $1.5 billion in the most recent quarter and has allowed the Board of Directors to maintain the dividend, which currently yields around 4.3%.

Pros and Cons of Investing In Kraft Heinz

The pros of investing in Kraft Heinz are its wide economic moat, brand power, improving margins and attractive dividend yield while the cons include a high debt load and poor share price performance.

It appears that operational efficiencies are starting to bear fruit thanks to efforts to streamline the supply chain and capitalize on digital transformation. So far, management has reported over $2 billion in cost savings since 2020. It’s clear however that further margin expansion is needed to mitigate input cost inflation. 

Looking to the future, management clearly has its eyes set on markets overseas, particularly in Latin America, where its Heinz and Quero brands have strong recognition. In addition, Kraft Heinz has partnered with NotCo, a plant-based food tech company, to create innovative products that cater to the growing demand for plant-based alternatives.

If it can tether new launches to high growth categories, Kraft Heinz has the potential to reward shareholders handsomely and the company’s price-to-earnings ratio of 12x suggests now may be as good a time as ever from a valuation perspective.

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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.