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Bear of the Day: The Kraft Heinz Company (KHC)

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The Kraft Heinz Company (KHC - Free Report) saw its stock price plummet last week after it reported dismal fourth quarter financial results. Now, the packaged food giant’s future looks less than bright as it tries to navigate shifting consumer habits and move beyond some self-inflicted wounds.  

Overview          

Kraft Heinz saw its stock price tumbled 27% last Friday after its reported worrisome Q4 results Thursday. The firm reported lower-than-expected earnings and revenue. Worse still, KHC wrote-down $15.4 billion on the value of some of its most famous brands, including Kraft and Oscar Mayer. Plus, the company said that the Securities and Exchange Commission is investigating its accounting practices.

The company also provided weak 2019 guidance and lowered its dividend. Many analysts have said that Brazilian private-equity firm 3G Capital’s—which is a KHC baker along with Warren Buffett’s Berkshire Hathaway —cost-cutting measures have hurt Kraft Heinz. The two food giants completed their merger in July 2015 in order to better compete in the rapidly changing consumer habits.

Since then, Kraft Heinz has seemingly failed to evolve with the more health-conscious shopper. In fact, the firm’s organic U.S. sales fell for six straight periods, beginning in Q1 2017. The company officially posted a $12.6 billion loss in Q4 and is expected to have to raise more cash to help pay down nearly $31 billion in long-term debt.

KHC stock closed regular trading Wednesday down 2.78% at $32.20 a share, which marked a 53% downturn from the company’s 52-week high of $68.59 per share.

Outlook & Earnings Trends

Moving onto 2019, our current Zacks Consensus Estimate calls for the company’s Q1 revenues to climb roughly 0.52% to reach $6.34 billion. Meanwhile, KHC’s full-year revenues are projected to pop just 0.39%. It is important to stress the challenges that Kraft Heinz faces in the packaged-food industry in an age when Amazon (AMZN - Free Report) was willing buy Whole Foods for $14 billion and the likes of Walmart (WMT - Free Report) and others have tried to roll out more organic offerings.

Even Buffett noted that the packaged-food market rests at a potential crossroads. “It’s very hard to offer a significant premium for a packaged-goods company and have it make financial sense,” he told CNBC last August. “Branded packaged goods are a very, very, very good business in terms of return on tangible assets. But they’re not a sensational business in terms of where you could be five or 10 years from now.”

Meanwhile, KHC’s adjusted quarterly earnings are projected to slip 6.7% in Q1 and 2% in the second quarter. Furthermore, the company’s earnings estimate revision activity has turned negative recently and the chart below shows how much its first-quarter consensus EPS estimate has fallen in the last seven days.

 

 

Bottom Line

Kraft Heinz is currently a Zacks Rank #5 (Strong Sell) based, in large part, on its earnings revision trends. The company also sports a “D” grade for Growth in our Style Scores system and rests in the bottom 33% of our 256 industries. Therefore, Kraft Heinz might be a stock to stay away from for now, despite its huge fall.

Those still interested in the industry might instead consider General Mills, Inc. (GIS - Free Report) , which is currently a Zacks Rank #2 (Buy) stock.

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