To The Moon

$The Kraft Heinz Company(KHC)$ In 2024 Kraft Heinz has also positioned itself as an innovator by introducing interactive products like the “Heinz Remix,” a digital sauce dispenser that allows consumers to customize sauces at select restaurants, similar to Coca-Cola’s Freestyle machines. Do you think Kraft Heinz can turn the Stock around?

Company Overview

Since 2017, Kraft Heinz (KHC), a global food giant with a market cap around $45.5 billion and over 200 brands spanning nearly 200 countries, has seen a steady decline in its stock value. The company’s struggles with growth and profitability have disappointed investors, who feel the brand hasn’t kept up with changing consumer preferences that favor fresh, unprocessed foods over its traditional offerings, such as boxed mac and cheese. In 2023, sales grew only 0.6% from the prior year, primarily due to price increases that impacted many packaged goods companies. This modest growth was compounded by reduced Supplemental Nutrition Assistance Program (SNAP) benefits and retailer inventory adjustments, both of which hindered performance.

Kraft Heinz's challenges stem from a rocky history following its 2015 merger, a $49 billion deal led by Berkshire Hathaway and 3G Capital. Initially, high expectations surrounded the merger, with investors hoping it would create a powerhouse in the food industry. However, cultural clashes emerged as Heinz, historically managed like a family business, integrated with Kraft, which had been transformed under 3G’s rigorous cost-cutting approach. In 2017, Kraft Heinz unsuccessfully attempted a $143 billion takeover of Unilever, a move hindered by cultural differences and Warren Buffett's aversion to hostile takeovers.

Earning Overview

$The Kraft Heinz Company(KHC)$ reported its Q3 2024 earnings on October 30, 2024, with an adjusted EPS of $0.75, slightly beating analysts' expectations of $0.74. The company recorded quarterly revenue of $6.38 billion, a 2.8% year-over-year decline and below the forecasted $6.42 billion. Despite these mixed results, Kraft Heinz has shown improved cost management, helping its gross margin increase by 180 basis points to 35.4% earlier in the year. However, in Q2 2024, the company faced challenges with a substantial 90% decline in GAAP EPS due to a non-cash impairment loss, which had impacted operating income​

Looking forward, analysts project Q4 2024 EPS at around $0.81, with revenues expected to reach approximately $6.8 billion. For the full year, Kraft Heinz’s projected earnings per share are $2.92. The company's next earnings report is expected around February 12, 2025.

Fundamental Analysis

Dividend Decline

Current dividend yield remains relatively attractive, the likelihood of a return to pre-2019 levels is low in the near term. The company continues to prioritize stability and growth through international expansion, product innovation, and debt reduction rather than returning to aggressive dividend increases.

Heavy Debt Load and Cost-Cutting Measures:

Following the merger between Kraft and Heinz in 2015, the company took on significant debt. This was initially managed through cost-cutting, driven by 3G Capital's zero-based budgeting strategy, which sought to reduce operational costs drastically. However, this approach was unsustainable for long-term growth, particularly in a competitive and evolving market. In 2019, Kraft Heinz was forced to re-evaluate its financial priorities, leading to a reduced dividend to help balance its financial obligations

Strategic Initiatives

Portfolio Streamlining: In recent years, KHC has streamlined its portfolio by divesting less popular brands, which allowed it to reduce debt and focus on core offerings. The focus has shifted towards healthier, plant-based products, value packs, and flavor customization technologies, like the Heinz Remix machine, which aims to enhance consumer engagement and expand KHC’s product appeal.

Geographic Expansion: Emerging markets offer significant growth potential for KHC, as evidenced by double-digit sales growth in these regions in 2023. Expanding internationally aligns with KHC’s long-term growth strategy, even though these markets currently represent a small portion of total revenue.

Risks and Challenges

Inflation and Cost Pressures: Rising input costs are a significant risk, as KHC has been compelled to increase prices. Consumers are increasingly price-sensitive, which could dampen demand. Furthermore, competition from private-label brands that offer similar products at lower prices poses a challenge to KHC’s market share.

Lack of Innovation

Kraft Heinz’s historic focus on cost-cutting under 3G Capital limited its ability to innovate and adapt quickly to changing consumer trends. While the company has made some recent efforts to invest in new product lines and enter emerging markets, these steps may not be enough to counteract the perception that its core brands are outdated. In today’s food industry, companies that don’t adapt quickly risk losing market share to agile competitors.

Struggles with Market Relevance:

Kraft Heinz’s traditional portfolio relies heavily on processed foods like ketchup, macaroni and cheese, and other packaged goods that have faced declining consumer interest as trends shift toward fresh and natural options. This shift has contributed to declining sales in key categories, making it difficult for KHC to gain momentum without significant strategic changes

Changing Consumer Preferences: There is a growing demand for healthier, less processed food, which impacts traditional Kraft Heinz products. Weight-loss drugs and dietary changes are emerging factors that could reduce demand for packaged and processed foods. However, KHC’s entry into plant-based products is an attempt to mitigate these risks.

Management and Long-Term Strategy

In 2024, Kraft Heinz introduced a ten-year strategy centered on its core brands, innovation, and a cultural transformation within the company. Although significant growth is unlikely soon, especially given inflationary pressures and rising private-label competition, these adjustments might sustain low single-digit growth for this mature U.S.-based food company.

Unlikely Return to Peak Stock Price:

KHC’s stock remains far below its 2017 peak of about $98, with analysts doubting a full recovery anytime soon. The stock has struggled due to a combination of factors including limited revenue growth, a challenging market environment, and competition, making it unlikely to regain previous highs in the near future.

Summary

Valuation and Stock Performance Despite attempts to improve operational efficiency and expand product offerings, KHC’s stock remains far below its 2017 high of about $98. The stock is unlikely to reach such levels soon due to industry-wide challenges and slow growth. However, low-single-digit growth is feasible given its core brand strength and new initiatives, especially if it can successfully expand in emerging markets​

While Kraft Heinz’s future remains uncertain, its focus on innovation and core brand strength could help it adapt to evolving consumer preferences, although it may not reclaim its former stock high of $98 in the near term.