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Kraft (KHC) Down 3.3% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Kraft Heinz (KHC - Free Report) . Shares have lost about 3.3% in that time frame, underperforming the S&P 500.

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

Kraft Heinz’s 1H19 Earnings & Sales Soft, Cost Woes Hurt

Kraft Heinz posted preliminary results for the first half of 2019. Adjusted earnings per share of $1.44 lost 23.8% year over year due to lower adjusted EBITDA and greater depreciation and amortization costs, somewhat made up by reduced taxes.

Net sales came in at $12,365 million, depicting a 4.8% fall from the prior-year period. Net sales decline includes an adverse impact of 0.7 percentage point from buyouts and divestitures as well as a negative impact of 2.6 percentage points from currency. Organic sales dipped 1.5%.

Pricing depicted a decline of 1.3 percentage points, owing to unfavorable promotions and reduced pricing in the United States, negated by higher pricing in ROW. Volume/mix fell 0.2 percentage points.

Adjusted EBITDA was down 19.3% to $3 billion in the quarter, with currency playing a spoilsport to the tune of nearly 3.3 percentage points. Excluding currency, softness in adjusted EBITDA was mainly driven by lower organics sales, elevated supply-chain expenses and investments for initiatives.

Q2 Highlights

In the second quarter of 2019, adjusted earnings came in at 78 cents per share, down 21.2% year over year. Adjusted earnings beat the Zacks Consensus Estimate of 75 cents.

Net sales fell 4.2% to $6,406 million and missed the Zacks Consensus Estimate of $6,643 million.

1H19 Segment Discussion

United States: Net sales of $8,713 million slipped 1.9% year over year. During the period, pricing and volume/mix declined 1.8 percentage points and 0.1 percentage points, respectively. Adjusted EBITDA decreased 14.6% to $2,384 million due to reduced net sales, higher procurement costs, elevated manufacturing and logistic expenses, and e-commerce and marketing investments.

Canada: Net sales of $1,010 million decreased 3.6% year over year, including a 4 percentage point adverse effect from currency translations. Organic sales rose 0.4%. Pricing declined 2.3 percentage points, whereas volume/mix grew 2.7 percentage points. Adjusted EBITDA tanked 14.1% to $264 million due to currency woes, reduced pricing and higher input costs.

EMEA: Net sales of $1,250 million decreased 10.2%, including adverse currency impacts of 6.1 percentage points and a 1.5 percentage point unfavorable effect from a South African joint venture’s sale. Organic sales fell 2.6% year over year. Pricing dipped 0.1 percentage point and volume/mix dropped 2.5 percentage points. Adjusted EBITDA declined 19.1% to $314 million due to currency woes, increased supply-chain expenses, reduced organic sales and costs related to certain investments.

Rest of World (comprising Latin America and APAC): Net sales of $1,392 million decreased 16.8%, with a 12.7 percentage point adverse impact from currency and 4.7 percentage point unfavorable impact from the sale of India nutritional beverages. This largely countered gains from Cerebos’ buyout. Markedly, organic sales were up 0.6%. Pricing climbed 1.6 percentage points, though volume/mix declined 1 percentage point. Adjusted EBITDA slumped 43% to $203 million due to currency woes, divestiture impacts, higher supply-chain costs and weak Asia-Pacific sales.

Financials

The company ended the first half of 2019 with cash and cash equivalents of $1,452 million, long-term debt of $29,832 million and total shareholders’ equity of $51,543 million.

In a separate press release, Kraft Heinz announced a quarterly dividend of 40 cents per share, which is payable on Sep 13, 2019, to shareholders of record as on Aug 21.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -18.82% due to these changes.

VGM Scores

At this time, Kraft has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Kraft has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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