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Kraft Heinz (KHC) Up 8.6% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for The Kraft Heinz Company (KHC - Free Report) . Shares have added about 8.6% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is KHC due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

First-Quarter 2018 Results

The Kraft Heinz Company posted first-quarter 2018 results, wherein earnings beat the Zacks Consensus Estimate while revenues missed the same. Higher input costs, lower sales in the United States along with higher investments to boost capabilities seemed to have adversely affected this food company’s quarterly performance. However, lower taxes and higher pricing have benefited the results.

In the first quarter, the company re-aligned some of its international businesses. It formed a new reportable segment — Europe, Middle East, and Africa (“EMEA”), by shifting Middle East and Africa businesses from the historical Asia Pacific, Middle East, and Africa (“AMEA”) operating segment to the historical Europe reportable segment. Now, the remaining AMEA operations have become the Asia Pacific (“APAC”) operating segment.

Earnings

Adjusted earnings per share of 89 cents surpassed the consensus mark of 82 cents. Also, the bottom line increased 6% from the year-ago figure on lower effective tax rate.

Sales

Reported sales of $6.3 billion fell marginally short of the Zacks Consensus Estimate of $6.35 billion by 0.7%. The top line also declined 0.3% year over year owing to soft consumer demand in North America and Rest of World. The reported figure includes a favorable 1.2% impact from currency. Organically, sales decreased 1.5%.

Volume/mix declined 2.5% compared with a decrease of 1.6% in the fourth quarter. This was due to lower shipments across several categories in the United States as well as Rest of World. Nevertheless, Canada and EMEA registered solid retail growth in the quarter. Foodservice also gained in the United States and EMEA.

Pricing was up 1%, same as the preceding quarter, driven by price improvement in Rest of World markets and the United States.

Operating Highlights

Gross profit of $2.2 billion increased 2.1% year over year. However, adjusted gross margin declined 20 bps from the prior-year quarter.

Adjusted EBITDA was down 2.6% to $1.8 billion in the quarter due to higher input costs, lower volume/mix and more spending in strategic initiatives. Adjusted EBITDA margin of 28.5% decreased 70 bps year over year.

Quarterly Segment Discussion

United States: Net sales of $4.4 billion declined 3.3% year over year. Organic sales also fell 3.3% on lower volumes. Volume/mix decreased 4.1% due to lower shipments of nuts, cold cuts and frozen potatoes, and in parts of the cheese business. Pricing was up 0.8%.

Canada: Net sales of $484 million grew 9.8% year over year owing to a 4.8% favorable impact from currency. Organically, sales were up 5% as well. Volume/mix was up 5% on higher cheese and coffee sales. Meanwhile, pricing remained flat compared with the prior-year quarter.

EMEA: Net sales of $685 million improved 14.7% year over year with a 12.4% favorable currency impact. Organically, sales were up 2.3%. Volume/mix inched up 2.8% on robust consumption gains in condiments, sauces and foodservice, and also owing to a strong soup season in the U.K. However, pricing declined 0.5% due to more promotional activity in infant nutrition, primarily in Italy.

Rest of World (comprising Latin America and APAC): Net sales of $767 million decreased 0.2% from the prior-year quarter due to a 3.2% currency headwind. Organically, sales grew 3% on 4.3% higher pricing. Volume/mix decreased 1.3%.

Financials

Kraft Heinz ended the quarter with cash and cash investments of $1.8 billion, as of Mar 31, 2018 compared with $1.6 billion as of Dec 31, 2017.

2018 Views

Second quarter is expected to face similar headwinds as seen in the first quarter, with an approximate 1.5% negative impact on volumes from Ore-Ida, Planters, and cold cuts; 1.2% from the combination of trade phasing and Easter shift; and 50 bps impact of base consumption.

While second-quarter sales growth is expected to be moderate owing to the above-mentioned factors, along with the lack of a repeating inventory build in cheese and lower programming in condiments, benefits from innovation should gather momentum during the second half of 2018 with improving consumption trends.

Management remains optimistic about the innovation pipeline for the back half of the year. Kraft Heinz will launch more new items in the second half of 2018 and these are also expected to “stick” better with consumers, given a more aggressive go-to-market strategy and better targeted, data-driven marketing.

Overall, the company continues to expect 2018 to be a year in which just less than half of its net sales and EBITDA will be delivered in the first half of the year and more than half in the second half.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to six lower.

The Kraft Heinz Company Price and Consensus

 

VGM Scores

At this time, KHC has an average Growth Score of C, however its Momentum is doing a bit better with a B. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for momentum investors than those looking for value and growth.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, KHC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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