Summary
- Based on filings made public over the past month, it looks like the worst for Kraft Heinz is likely over.
- Though shares aren't exactly cheap, they are trading low for a high-quality industry leader.
- This gives investors the opportunity to jump in should they choose, though some risks do still exist.
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One of America’s (and perhaps the world’s) most iconic businesses, The Kraft Heinz Company (KHC), has been experiencing, over the past several months, one of its most volatile and uncertain times ever. Driven by an SEC investigation and an acknowledgement of wrongdoing by the business (perpetrated by non-senior employees), the company has lost the confidence of many of its investors, but now that the issues at hand are finally getting resolved, now might be the best time for investors and prospective investors (those recognizing that some risks do still certainly exist) to dive back in if they haven’t already.
The risks are subsiding
In October of last year, the management team at Kraft Heinz received a noticefrom the SEC wherein the government entity stated that it was opening an investigation into the company’s accounting policies surrounding its procurement practices and related to its goodwill and intangible asset impairments. This carried over into February of this year when management announced its intentions to write down its Kraft and Oscar Mayer brands to the tune of $15 billion total and elected to slash the dividend being paid by the firm by 36%. As a result of all of these developments, shares of the business plummeted. Today, units can be picked up for a discount of about 53.5% compared to where their 52-week point was.
This, naturally, offers investors with attractive upside potential, but with that potential comes risk: the possibility of the SEC finding something really bad, the possibility of additional impairments, some chance of more internal issues that will affect the company, all on top of regular business risks that any firm in any industry must contend with. Fortunately, though, the picture for Kraft Heinz does appear to be getting better by some degree. On May 6th, management released a filing on the SEC’s EDGAR database wherein it revealed that, on a preliminary basis, its net income had been overstated over a span of three years by a total of $62 million, while its EBITDA had been overstated by $244 million.
On June 7th, this was followed up with a release of the firm’s 2018 financial results, as well as restated financials for the prior few years. According to management, misconduct from several individuals in the procurement area related to supplier rebates, upfront consideration, incentive agreements, and pricing agreements ultimately led to a difference in net income (in aggregate) for the company of only around 1% for the period of 2015 through 2018. As a result of these corrections, the company did state that its costs would decrease in future periods, though the exact connection here is not entirely certain. On the whole, management believed the misstatements to be quantitatively immaterial (and they are by accounting standards), but because they consisted of failures related to financial reporting over internal control, they were qualitatively material.
Any sort of failure regarding internal control is or should be material to a company. This is because, while the internal failure may not result in any material misstatement to earnings (or it may), the fact that an internal control issue exists means that the entire company might be susceptible to bad actors. The ability, for instance, of an unauthorized person to change company account statements and/or a lack of oversight that might lead to an intentional sabotaging of financials for one’s (or a group’s) personal gain can have company-wide ramifications.
