To The Moon

$The Kraft Heinz Company(KHC)$

Earning Overview

Kraft Heinz (KHC) released its fourth-quarter and full-year 2024 financial results on February 12, 2025. The company reported a 4.1% decrease in fourth-quarter net sales, amounting to $6.58 billion, which was below analyst expectations. Adjusted earnings per share (EPS) for the quarter were 84 cents, surpassing the anticipated 78 cents. For the full year, net sales declined by 3% to $25.85 billion, slightly missing forecasts.

Looking ahead, Kraft Heinz projected 2025 adjusted EPS between $2.63 and $2.74, below the consensus estimate of $3.04. The company also anticipated that annual organic sales would be flat or decrease by up to 2.5%.

While I appreciate some of Kraft Heinz's iconic products, the company has struggled for years to generate meaningful growth. The COVID-19 pandemic and increased home eating in 2020 gave a temporary boost to its revenues, but performance has largely remained stagnant since then. In its most recent full-year results for 2024, the company reported a 3% decline in net sales, along with a 2.2% drop in diluted earnings per share, bringing full-year earnings to $2.26 per diluted share.

Fundamental Analysis

The decline in unit sales over the past two years suggests that the company may need to invest in product enhancements to regain momentum. The projected 3.5% revenue decrease for the next 12 months indicates a sharp drop in demand. Expenses have risen as a percentage of revenue over the past year, contributing to a 10.7 percentage point decrease in operating margin.

In the most recent trading session, Kraft Heinz (KHC - Free Report) closed at $29.89, reflecting a -1.65% decline from the previous day’s close. The stock underperformed the S&P 500, which gained 1.08% on the day. The Dow increased by 0.92%, while the tech-heavy Nasdaq rose by 1.41%.

The processed food company, with dual headquarters in Pittsburgh and Chicago, has seen a 3.65% rise in its stock over the past month, outperforming the Consumer Staples sector’s 3.42% gain and the S&P 500’s 8.26% loss.

Investors are keenly anticipating Kraft Heinz's upcoming earnings release. The company is expected to report an EPS of $0.61, marking an 11.59% decrease from the same quarter last year. Additionally, the consensus estimate forecasts revenue of $6.01 billion, reflecting a 6.21% decline compared to the previous year’s quarter.

Guidance

Looking ahead to 2025, Kraft Heinz has provided a weak outlook, expecting sales to remain flat or decline by up to 2.5% compared to 2024. Adjusted operating income is forecasted to fall by 1% to 4%, and free cash flow is expected to stay flat.

Guidance Below Expectations: Kraft Heinz's guidance for 2025, with projected adjusted EPS of $2.63 to $2.74, has fallen short of analyst expectations of $3.04. This has led to concerns about the company's ability to drive significant earnings growth in the near term, which dampens investor enthusiasm.

Free Cash Flow

(KHC) reported its full-year 2024 financial results, highlighting a free cash flow (FCF) of $3.2 billion, a 6.6% increase from the previous year. This growth was primarily driven by a 5.2% rise in net cash provided by operating activities, reaching $4.2 billion. In the fourth quarter of 2024, the company achieved a free cash flow of $0.96 per share. This performance reflects Kraft Heinz's ongoing efforts to enhance operational efficiency and generate substantial cash flow.​

Risks and Challenges

Declining Sales and Market Share: The company has experienced declining unit sales and overall revenue in recent quarters. This trend could worsen if Kraft Heinz doesn't successfully address changing consumer preferences, such as a shift toward healthier or plant-based food options.

Increasing Competition: The processed food industry is highly competitive, with Kraft Heinz facing pressure from both traditional food giants and new entrants offering organic or premium products. This competition could result in price wars and loss of market share.

Inflation and Supply Chain Pressures: Rising raw material and transportation costs, along with supply chain disruptions, could affect the company's profitability. Kraft Heinz may struggle to pass these increased costs on to consumers without losing demand.

Changing Consumer Preferences: There's a growing shift toward healthier eating, with more consumers opting for fresh, organic, and plant-based foods. Kraft Heinz’s portfolio, heavily focused on traditional processed foods, could be at risk if it doesn’t adapt to these changing trends.

Cost Structure and Margin Pressure: While Kraft Heinz has managed to improve its free cash flow, its operating margins have come under pressure. Rising expenses as a percentage of revenue may continue to challenge profitability if the company doesn't effectively manage its cost structure.

Debt Levels: Kraft Heinz carries a significant amount of debt, which could pose challenges, particularly if interest rates rise or if the company faces a downturn in revenue.

Valuation

When examining its valuation, Kraft Heinz currently has a Forward P/E ratio of 11.35, which is below the industry average of 16.65.

Additionally, KHC has a PEG ratio of 3.41. This metric, similar to the well-known P/E ratio, accounts for the company’s expected earnings growth rate. As of yesterday’s market close, the average PEG ratio for the Food - Miscellaneous industry stood at 1.96.

Market sentiment

Known for beloved products like Heinz ketchup and Oscar Mayer hot dogs, Kraft Heinz has struggled to find its footing in recent years, relying on reduced expenses to boost net income. While this strategy has worked in the short term—helping the company increase net income by nearly 21% in 2023—it failed to prevent a decline in earnings for 2024. Over time, however, it's difficult to generate sustainable profits from flat top-line sales, which makes the company less appealing to investors right now.

Overall, Kraft Heinz has underperformed the market by 44% over the past five years (at the time of writing), and there doesn’t appear to be much momentum to drive the stock forward. If you're primarily looking for dividends, Kraft Heinz does have the ability to maintain its 5% yield, but there are plenty of other healthier investment options in the market. In fact, investing in an S&P 500 index fund would have delivered significantly better returns over the last five years.

Declining Sales and Profit Margins: Kraft Heinz has faced challenges with declining sales, especially in its core processed food segment, which has led to concerns about its long-term growth prospects. The company’s operating margins have also been under pressure, with expenses rising as a percentage of revenue.

Economic Headwinds: Market volatility, inflation, and rising raw material costs have contributed to a cautious outlook for Kraft Heinz. The company’s stock may struggle to gain significant traction if these economic pressures persist.

Conclusion

Kraft Heinz (KHC) is one of the stocks backed by Warren Buffett’s Berkshire Hathaway, but it has disappointed investors over the past several years, with its stock trading sideways for about five years. Despite this, with the broader market reaching record valuations, a 5.29% yield from KHC offers a better return than keeping money in the bank.

However, the real reason to consider investing in KHC lies in the company’s improvements. Over the past five years, Kraft Heinz has consistently reduced its debt, cutting it by approximately one-third. Additionally, the company has enhanced its operating cash flow, further mitigating the negative effects of its debt. The cash flow-to-debt ratio has increased from 0.1 to 0.2, demonstrating the company's progress in lowering debt risk.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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