Summary
- Kraft Heinz stock is down over 50% in the past year.
- New CEO is a marketing specialist focus in rolling out new products and improving current line-up.
- Now is the time to buy, when the stock is at 8.8 PE, before the turnaround is fully apparent.
- Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Get started today »
Everybody gets so much information all day long that they lose their common sense. – Gertrude Stein
As discussed in the September Lead-Lag Report, “The consumer staples sector caught some bids as a defensive play and looks to have resumed its 2019 uptrend. Healthy consumer spending continues to support this sector.” If you want to jump into the consumer staples sector you can easily add the very popular ETF, Consumer Staple Select Sector SPDR (XLP) to your portfolio, but you may also want to consider some under-represented names. XLP has 35 holdings and the top 5 stocks make up 52% of the assets. This leaves stocks with good potential with little to no effect on the overall performance of XLP. One such name is Kraft Heinz Company (KHC).
Kraft Heinz is the third largest food and beverage manufacturer in North America and the fifth largest in the world. KHC has had it’s share of missteps in the past that have led to very poor stock performance. Compared to two of its larger competitors, Pepsico and Nestle, Kraft Heinz has severely underperformed them over the past year. In the 4th quarter 2018, KHC took a large non-cash impairment charge to reduce the carrying value of goodwill and intangible assets such as trademarks.
Most investors are focused on this uneven net income, that went from $618 million in Q3 2018 to -$12,628 billion in Q4 2018 and back to $404 in Q1 2019, but Kraft Heinz has been trying to turn its business around since the merger four years ago. It has been focused on reducing its operational inefficiencies. They have reduced the workforce and enhanced it supply chain. This efficiency shows up in the lower cost of goods sold. Compared to 4 years ago, sales have increased 4.7% while cost of goods sold has dropped 3.7%, leading to an increase in gross profit of 28%, based on quarterly numbers. They boast operating margins of mid-20%, compared to mid-teens for most competitors.
Miguel Patricio, former chief marketing officer of AB Inbev, took over as CEO in June. Now is the time that his vision will start to take shape. Kraft Heinz has proven their operational efficiencies and cost savings, now they must prove they are going to invest in their brands and keep sales growing. KHC is listening to millennials, by focusing on healthier, more natural options. They have organic ketchup which is vegan, ketchup with added vegetables, and partnered with Pioneer Woman and Ophrah Winfrey for new prepared foods. There has been a shift in the grocery stores from the center-isle prepared food to the outer-isle fresh food. KHZ is trying to draw consumers back to the middle of the store with these new items. Kraft Heinz also needs to dive deeper into club stores such as Costco and Sam’s Club. They currently have less than 15% of products in these stores, which leaves plenty of room for growth. As Patricio continues to review Kraft Heinz business lines, he is focused on developing the most profitable while possibly selling off the non-core assets.
