BUSINESS
The Kraft Heinz Company, together with its subsidiaries, manufactures and markets food and beverage products in the United States, Canada, the United Kingdom, and internationally. Its products include condiments and sauces, cheese and dairy products, meals, meats, refreshment beverages, coffee, and other grocery products. The company also offers dressings, healthy snacks, and other categories; and spices and other seasonings.
INVESTMENT RATING
KHC’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.
Kraft Heinz has a current Value Trend Rating of B (Positive).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Kraft Heinz has a neutral Power Rating of 56 but a good Appreciation Score of 81, with the Positive Value Trend Rating the result.
Kraft Heinz’s stock is selling well below targeted value. The current stock price of $34.16 compares to targeted value 12 months forward of $94.
Kraft Heinz’s high appreciation potential results in an appreciation score of 81 (only 19% of the universe has greater appreciation potential.)
Kraft Heinz has a Power Rating of 56. (This neutral Power Rating indicates that KHC’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: earnings estimate behavior for KHC has been slightly favorable recently; and recent price action has been neutral. An offsetting factor is the Canned, Frozen, Preserved Fruit & Vegetables comparison group is in a slightly weakened position currently.
INVESTMENT PROFILE
KHC’s financial strength is high. Financial strength rating is 74.
Relative to the S&P 500 Composite, The Kraft Heinz Co has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that KHC is normal risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low expected growth, low historical growth, and high earnings variability. KHC’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. KHC has normal market capitalization.
CURRENT SIGNALS
Kraft Heinz’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.
Kraft Heinz’s current technical position is mixed. The stock price is in a 2.6 month up move. The stock has appreciated 21.2% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.
ALERTS
Recent notable negative changes in investment behavior have affected The Kraft Heinz Co (NASDAQ: KHC): the stock fell on very heavy volume.
In light of this new information we are reviewing our current Overall Rating of B. This review will be completed in the next several days.
The Kraft Heinz Co (NASDAQ: KHC) has reported E.P.S. of $0.62 for its fourth fiscal quarter (ending December 31) versus $0.73 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $2.33 versus $1.93 for the same period a year ago.
The Kraft Heinz Co (NASDAQ: KHC) stock suffered a large decline of -5.5% on 2/14/24. The stock closed at $34.16. Moreover, trading volume in this decline was exceptionally high at 250% of normal. The stock has performed in line with the market over the last nine months and has declined -8.2% during the last week.
CASH FLOW
In 2022, Kraft Heinz experienced a very significant reduction in cash of -$2,405 million (-70%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$5,859 million. Non-operating uses consumed -$1,006 million (-17% of EBITDA). Cash taxes consumed -$982 million (-17% of EBITDA). Re-investment in the business amounted to -$682 million (-12% of EBITDA). On a net basis, debt investors withdrew -$2,611 million (-45% of EBITDA) while equity investors received -$2,983 million (-51% of EBITDA).
Kraft Heinz’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Kraft Heinz Peer Group. (Since 2020 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, Kraft Heinz was in the lower quartile. Currently, Kraft Heinz is lower quartile at -17% of EBITDA (-$1,006 million).
Kraft Heinz’s Cash Taxes, %EBITDA experienced a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Kraft Heinz Peer Group. In most years, Kraft Heinz was in the third quartile. Currently, Kraft Heinz is below median at -17% of EBITDA (-$982 million).
Kraft Heinz’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Kraft Heinz Peer Group. (Since 2018 Business Re-investment, %EBITDA has experienced a very sharp decline.) In most years, Kraft Heinz was in the top quartile and second quartile. Currently, Kraft Heinz is slightly below median at -12% of EBITDA (-$682 million).
Kraft Heinz’s Debt Investors, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Kraft Heinz Peer Group. In most years, Kraft Heinz was in the lower quartile and top quartile. Currently, Kraft Heinz is substantially below median at -45% of EBITDA (-$2,611 million).
Kraft Heinz’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Kraft Heinz Peer Group. (Since 2017 Equity Investors, %EBITDA has decelerated very sharply.) In most years, Kraft Heinz was in the second quartile and top quartile. Currently, Kraft Heinz is above median at -51% of EBITDA (-$2,983 million).
Kraft Heinz’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Kraft Heinz Peer Group. (Since 2019 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Kraft Heinz was in the lower quartile and second quartile. Currently, Kraft Heinz is lower quartile at -41% of EBITDA (-$2,405 million).
Kraft Heinz’s Cash, %Revenue has experienced a minor downtrend over the period. This downtrend was accompanied by an opposite trend for the Kraft Heinz Peer Group. In most years, Kraft Heinz was in the third quartile. Currently, Kraft Heinz is at the lower quartile at +4%.
PROFITABILITY
Kraft Heinz’s return on equity has improved very significantly since 2015. The current level of 6.1% is 5.52X the low for the period and is -4.2% from the high.
This very significant improvement was due to very strong positive trend in pretax operating return offset by very strong negative trend in non-operating factors.
The productivity of Kraft Heinz’s assets rose over the full period 2013-2023: asset turnover has enjoyed a very strong overall uptrend.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2020 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
Kraft Heinz’s return on equity is lower quartile (6.1%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at median (4.2%) reflecting asset turnover that is upper quartile (0.30X) and lower quartile pretax margin (13.7%).
Tax “keep” rate (income tax management) is below median (80.0%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is lower quartile (1.82X).
GROWTH RATES
There are no significant differences between Kraft Heinz’s longer term growth and growth in recent years.
Kraft Heinz’s historical income statement growth and balance sheet growth have diverged. Revenue growth has exceeded asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 2.5% per year.
Total asset growth has been -4.4% per year.
Annual E.P.S. growth has been -13.5% per year. (More recently it has been 118.5%.)
Equity growth has been -3.0% per year.
Kraft Heinz’s consensus growth rate forecast (average of Wall Street analysts) is 4.8% — substantially above the average of the historical growth measures.
Relative to the Kraft Heinz Peer Group, Kraft Heinz’s historical growth measures are generally lower quartile. Revenue growth (2.5%) has been substantially below median. Total asset growth (-4.4%) has been lower quartile. E.P.S. growth (-13.5%) has been lower quartile. Equity growth (-3.0%) has been lower quartile.
Consistent with this pattern, consensus growth forecast (4.8%) is also substantially below median.
PRICE HISTORY
Over the full time period, Kraft Heinz’s stock price performance has been variable and significantly below market. Between September, 2015 and February, 2024, Kraft Heinz’s stock price fell -52%; relative to the market, this was a -81% loss. Significant price move during the period: 1) May, 2017 – August, 2019: -72%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -4.2% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through January, 2024 of -4.2% is substantially below median relative to The Kraft Heinz Co Peer Group.
Current 5-year total return performance of -0.4% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -0.4% relative to S&P 500 Composite, Kraft Heinz’s total return performance is lower quartile relative to The Kraft Heinz Co Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, KHC’s overall valuation is quite low. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/revenue, followed by the price/earnings ratio, then by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets. The lowest factor, price/equity ratio, is lower quartile.
Relative to Kraft Heinz Peer Group, KHC’s overall valuation is quite low. The highest factor, the ratio of enterprise value/assets, is slightly above median. Price/earnings ratio is slightly below median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
Kraft Heinz has a major value gap compared to the median. For KHC to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.27X to 5.76X. If KHC’s ratio of enterprise value/revenue were to rise to 5.76X, its stock price would be higher by $77 to $111.
For KHC to achieve upper quartile valuation relative to the Kraft Heinz Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.27X to 8.99X. If KHC’s ratio of enterprise value/revenue were to rise to 8.99X, its stock price would increase by $149 from the current level of $34.
VALUE TARGETS
KHC’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.
Kraft Heinz’s current Price Target of $95 represents a +178% change from the current price of $34.16.
This high appreciation potential results in an appreciation score of 81 (only 19% of the universe has greater appreciation potential.)
With this high Appreciation Score of 81, the neutral Power Rating of 56 results in an Value Trend Rating of B.
Kraft Heinz’s current Price Target is $95 (-18% from the 2022 Target of $115 but +178% from the 02/14/24 price of $34.16). This slight fall in the Target is the result of a -9% decrease in the equity base and a -10% decrease in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted increase in cost of equity has a very large negative impact.
PTR’s return on equity forecast is 8.4% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is above the 2014 low of 4%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is significantly below the 2016 peak of 17%.
PTR’s cost of equity forecast is 3.3% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2015 and 2022. The current forecast is below the 2018 peak of 5.9%.
At Kraft Heinz’s current price of $34.16, investors are placing a negative value of $-48 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 6.8% versus a cost of equity of 2.4%.
PTR’s 2024 Price Target of $95 is based on these forecasts and reflects an estimated value of existing assets of $72 and a value of future investments of $23.
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