What to Expect for Kraft Heinz
Before Kraft and Heinz merged to form Kraft Heinz Co (NASDAQ:KHC) in a deal blessed by Warren Buffett’s Berkshire Hathaway, their sales had dropped by 4.9% and 4.1%, respectively. In August 2015, the group cut 2,500 jobs, or about five percent of its payroll, including 700 jobs at the former Kraft Foods headquarters in Illinois.
In November 2015, Kraft Heinz delivered its first quarterly earnings report as a single company, announcing a $303-million loss for the third quarter of 2015. But Kraft Heinz could yet deliver a profitable surprise. Here’s why…
Coming into its fourth fiscal quarter of 2015, investors hope that after the teething problems of the merger, the company can start heading into a more profitable direction. KHC stock has traded like a rollercoaster between peaks of $79.00 and valleys of $69.00 per share. Nevertheless, the stock has been trending upward in expectation of better results.
Kraft Heinz, whose brands include Kraft, Heinz, Capri Sun, Jell-O, Maxwell House, and others, is a leaner company today and investors are hopeful that a turnaround is on the way.
Hopes aside, what can investors realistically expect?
The fact that 3G Capital was one of the partners in the merger, along with Berkshire Hathaway, is an important indicator. 3G Capital likes to see itself as a financial engineer. Its record with mergers and acquisitions (M&A) speaks for itself and it tends to repeat the model. 3G Capital buys companies and cuts costs to the lowest possible denominator in a quest for net earnings. Its ultimate target is always the share price. Based on this formula, we can expect that KHC stock will surge, as the merged Kraft Heinz entity is a slimmer and more profitable version of itself.
3G Capital, as its history informs us, also likes to sell the leaner companies at the higher stock valuation. Yet, Berkshire Hathaway is the majority shareholder, so investors can expect efforts to improve sales—not just make cuts.
Kraft Heinz also offers a 3.3% dividend yield, higher than the market average for U.S. companies. (Source: “Warren Buffett’s Top 20 Dividend Stocks with the Highest Yields,” Sure Dividend, February 12, 2016.)
Yet, as is the case for retail companies, investors can expect the strong dollar to have added resistance against sales growth for Kraft Heinz stock. In the third quarter, the company reported weaker demand for its beverages. There is little to suggest this has changed in the most recent quarter.
Overall, many are anticipating KHC stock results if for no other reason than to get a better sense of the company’s guidance. The Q4 report is where Kraft Heinz should present a clearer picture of its outlook. Until now, the company has been mute on what investors can expect. The Street does expect Kraft Heinz to report Q4 adjusted earnings of $0.57 per share, according to the mean estimate of analysts polled by Capital IQ. (Source: “Kraft Heinz’s Q4 Report to Show 2nd Quarter of Post-Merger Results; Investors, Analysts Want Guidance (NASDAQ:KHC),” Sonoran Weekly Review, February 25, 2016.)
Revenue should be in the $7.0-billion range. In the third quarter, revenue was $6.40 billion. The company put much of the blame on the high dollar. Given that the U.S. dollar uptrend continues against major currencies, sales should not be much higher.
Deutsche Bank analyst Eric Katzman said, “foreign exchange headwinds could limit earnings per share.” (Source: Ibid.) Still, Deutsche Bank has KHC stock as a “Hold.”
In sum, the two main factors to consider are the cost savings and lower sales due to the strong dollar. These are the main factors driving KHC stock’s performance.
Like many of its competitors, from Mondelez to General Mills, Kraft Heinz Co is losing market share. Consumers want healthier foods and they are turning away from processed foods in greater numbers. Therefore, nobody is expecting higher sales.
Yet, investors can expect a continued and aggressive focus on cost cuts and profitability from KHC stock. (Source: “Kraft Heinz to post Q4 earnings: A beat in the Cards?” Zacks, February 23, 2016). This crucial factor could deliver an earnings surprise.