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Bull of the Day: Kraft Heinz (KHC)

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The effects of Covid-19 and the related shutdowns continue to ripple through the economy, affecting industries in drastically different ways – many of which have been far from what seemed obvious before the crisis.

One relatively bright spot has been packaged food companies, who have been experiencing sales that are at least at the level they were before the crisis. One such company is a very much household name – Kraft Heinz (KHC - Free Report) . It’s virtually guaranteed that you have the products of several familiar Kraft Heinz brands in your refrigerator and cabinets right now.

With seven upward revisions since last week’s earnings report, KHC earns a Zacks Rank #1 (Strong Buy).

In most times, the big food companies tend to be a fairly boring topic as far as investment opportunities go.  Their business is stable and consistent and their revenues and earnings releases don’t tend to include large surprises. Stable (if unspectacular) low single digit growth generally also allow modest dividend yields.

Though consumer tastes shift over time, people don’t tend to drastically change the amount of food they eat. Economies of scale allow the giant producers a great deal of control over raw materials prices and competition on the shelves keeps retail prices fairly consistent as well.

Snooze, right?

Well it’s become at least a little bit more interesting story in the era of the Covid outbreak. First, we saw huge increases in sales at grocery and big-box stores as consumers hoarded large amounts of packaged food in anticipation of long quarantines in their homes. Bare shelves at the supermarket meant big sales for producers.

It wasn’t actually all that great. The cost of ramping up production and packaging facilities and rushing replacement goods to the marketplace consumed at least some of the windfall. Plus, pretty much all industry observers knew that at some point, all the panic buying meant you couldn’t find a box of macaroni on the supermarket shelf for a while, but it also meant many customers wouldn’t be heading back for more anytime soon.

Now that the original panic is past and consumers are comfortable with their ability to buy food whenever they choose and in more normal quantities, sales have largely stabilized.

There has been an important shift for Kraft Heinz, however – the widespread closure of restaurants and resulting shift to retail sales. In the most recent quarter, management noted, “increased retail demand that more tan offset lower foodservice related sales.”

Net sales growth of 3.8% and organic sales growth (excluding the costs of divestitures and currency impact) of 7.4% are pretty big gains for a company that’s more accustomed to something more like 0-2%. Even better, prices were up 2.2% over the prior-year period which the report attributed to “reduced promotional activity” – less discounting and coupons.

There’s also another possible reason for the price increases – container size. Retail consumers buy different quantities of goods during a trip to the store and KHC would rather sell 8 squeeze bottles of ketchup than the 7 pound cans that go primarily to restaurants. Though KHC didn’t specifically mention that effect in the report, we’ve seen the opposite effect in some liquor sales. Retail customers stock up on 1.75L liquor and 1.5L wine while restaurants buy more 750ml bottles.

Sure it’s still not a really exciting story, but during uncertain times, owning a $43 billion US company that’s seeing better than expected sales growth during the crisis - and pays a 4.5% dividend yield might be just the right kind of boring.

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