Kraft Heinz (KHC) is one of the world’s largest food and beverage companies and has emerged from the merger of Kraft Foods and HJ Heinz Co. The stock has lost 45% this year. Are the losses justified or is this the opportunity to get started?
The bears have good arguments. Since the merger, the company seems to be preoccupied with itself. The reorganization of the business takes more time than expected, and the synergies have so far been delayed. After showing significant growth at start, sales and profitability have recently declined again. Of course, this did not cause any joy among the investors. Even bigger problems become visible with regard to the balance sheet. As a result of the merger, long-term debt jumped from $13.36 to $25.15 billion. Meanwhile, long-term debt totals $31.0 billion. So the direction is not right. In the case of Kraft Heinz the value for Debt/Equity is 0.5. This means that the company has twice as much assets as debt exist.
Of course, the pros have arguments on their side. The debt is more normal when compared to others in the industry comparison. Kraft Heinz comes with its branded products on particularly high margins and can therefore afford the debt. The high level of business assets is also positive. After all, land, factories and machines also have value. They can be sold at any time to pay off the debts. The company has strong brand power. There will be few households who have never bought Jacobs Coffee, Philadelphia, Oreo, Milka, Toblerone or Heinz Ketchup, just to name a few.
But since the mega-merger of Kraft and Heinz and the IPO, the stock has lost half of its value. This is very unusual for a global corporation in this sector as the food industry is defensive.
This should rather support the stock in troubled times. So where are the buyers?
Outlook and fundamental valuation
In the first nine months of the current fiscal year, sales increased nearly 2% to $19.37 billion. Earnings were similarly subdued, climbing from $2.65 to $2.67 per share. Full-year earnings are expected to increase from $3.55 to $3.62 and $3.71 per share in 2019.
KHC has a P/E of 15.07 and a forward P/E of 11.40. In a consumer defensive sector, this valuation is acceptable even with low growth. Larger competitors such as Nestle or Unilever both have PE over 20. Even including debt, the P/E of Kraft is attractive at 18. The dividend yield is 5.5%, the highest in the peer group.
In addition, the downside potential is likely to be dwindling after the price halves. It will not be able to go down forever, because Kraft Heinz is not a fantasy. KHC is also struggling to get the grocery games right, but once that happens, the sentiment could change abruptly.