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Will Cost Cut Help Kraft Heinz (KHC) Beat in Q2 Earnings?

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We expect The Kraft Heinz Company (KHC - Free Report) to beat expectations when it reports second-quarter 2017 results after market close on Aug 3. Last quarter, this packaged food manufacturer delivered a negative earnings surprise of 1.18%. However, the company delivered a positive earnings surprise in three of the last four quarters, the average beat being 8.09%.

The chart below depicts the surprise history.

The Kraft Heinz Company Price and EPS Surprise

 

The Kraft Heinz Company Price and EPS Surprise | The Kraft Heinz Company Quote

Why a Likely Positive Surprise?

Per our proven model, Kraft Heinz has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to be able to beat estimates.

Zacks ESP: The Most Accurate estimate stands at 97 cents per share, while the Zacks Consensus Estimate is pegged at 96 cents resulting in an Earnings ESP of +1.04%. This is a meaningful indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Kraft Heinz carries a Zacks Rank #3.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Factors at Play

The company has been witnessing top-line weakness for the last several quarters. Soft spending by U.S. shoppers along with rapid change in consumer preferences and behavior are hurting the company’s categories. Kraft Heinz, like many other U.S. food producers, has been struggling due to the shift in consumer preference toward natural and organic ingredients over packaged and processed food. This trend is likely to continue in the to-be-reported quarter.

Hence, weak consumption trends in the U.S. along with currency headwinds in Europe are likely to restrict sales growth in the near term.

Nonetheless, this Pittsburgh, PA-based packaged food company’s cost-savings and restructuring initiatives have been giving a boost to the margins, thereby driving the bottom line, which is likely to continue in the to-be-reported quarter. The company also expects its go-to-market activity to normalize in Canada, which is likely to further support sales.

That said, adverse impact of lower volumes and higher commodity costs raise concern.

Overall, for the second quarter, the Zacks Consensus Estimate for earnings is pegged at 96 cents, reflecting a 13.1% year-over-year increase. However, the consensus estimate for revenues is $6.70 billion, implying a 1.3% decline.

Stocks to Consider

Here are a few companies in the Consumer Staple sector you may want to consider as our model shows that these also have the right combination of elements to post an earnings beat.

Church & Dwight Company, Inc. (CHD - Free Report) has an Earnings ESP of +2.56% and a Zacks Rank #3. The company is scheduled to report quarterly numbers on Aug 3.

The Clorox Company (CLX - Free Report) has an Earnings ESP of +0.67% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is scheduled to report quarterly numbers on Aug 3.

Coca-Cola European Partners PLC (CCE - Free Report) has an Earnings ESP of +4.69% and a Zacks Rank # 2. The company is scheduled to report quarterly numbers on Aug 10.

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