Stock Analysis & Ideas

Kraft Heinz Stock: Tasty as Its Treats

I am bullish on The Kraft Heinz Company (KHC) stock as it claws its way up in price.

KHC Market Power Dominates

A relatively new management team is dedicating efforts to reviving momentum. The goals are to stimulate revenue and earnings growth over the long term, reduce debt, and improve shareholders’ returns.

The $1.1-trillion food industry is essential to global economic stability. Happiness is a full belly. Yet, the food industry is not glitzy and glamorous like biomedical business and the digital economy. (See Analysts’ Top Stocks on TipRanks)

Sentiment among media coverage for KHC is neutral. The sentiment is very negative among TipRanks investors recently. KHC is a $45.5-billion (market cap) behemoth.

It owns marauding swarms of the most recognized household brand name products. KHC, the third-largest food-beverage company in North America, ranks 10th among the top 49 companies in the packaged foods and meat industry.

KHC spends over half-a-billion dollars every year on marketing. Marketing spent around $100 million on digital and national TV advertising Kraft Macaroni and Cheese last year.    

Its brands of condiments, sauces, cheeses, dairy products, packaged meals, meats, seafood, coffee, sports beverages, nuts, snacks, desserts, baked goods, and other grocery choices, give KHC tremendous market power.

It’s Been a Rocky Road

The stock topped $90 per share following the 2015 merger of Kraft and Heinz. Shares steadily swooned since 2017 but bounced back in 2021.

Shares now sell for around $37. Short interest hovers below 4%. This year-to-date, KHC is up 7.7%. The stock price is up 23% over the past 52 weeks. Shares are down 46% over the past five years.

Debt is $24.5 billion as of September 25, down around $5 billion year-over-year. Liabilities total more than cash and receivables. The free cash flow will probably be used to pay down debt rather than increase the dividend. The company settled this fall an SEC investigation into financial irregularities for $62 million.  

From now on, management is focusing on building momentum, paying down debt, and settling accusations of accounting schemes that undermined shareholder confidence and tarnished its corporate identity.

The average KHC price target is $39.44, representing a slim 6.9% upside. The highest target price is $45.

KHC is Packaged Attractively

Despite extrinsic and intrinsic challenges facing the food industry and KHC in particular, the dividend yield is an attractive 4.3%. The sector average is 1.3%. KHC trades at 13.9 forward earnings.

Everyone expects less from KHC, but gets better than expected. In October, KHC reported Q3 non-GAAP and GAAP EPS of $0.65 and $0.59, respectively. Both beat estimates. Revenue slipped 1.9% but came in higher than expected at $6.3 billion.

The future looks strong. Restaurants and other food entertainment venues are reopening, and patrons are returning with vigor. Fiscal Year 2021 revenue is labeled “flat” but that is in comparison to 2020 which was an exceptionally strong year.

Inflation is giving the company an opportunity to raise prices higher than the inflation rate.

The media produces, on average, almost 20 articles per week about KHC. The number is up to 30 articles per week this fall. Words of praise for the new management team flow from KHC’s largest shareholder and The Big Short‘s Michael Burry.

Add to the mix that hedge funds recently increased their holdings by 183,900 shares, and it’s hard not to feel positive about KHC.

Disclosure: At the time of publication, Harold Goldmeier did not have a position in any of the securities mentioned in this article.

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