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A Bitter Taste: Kraft Heinz Struggles To Gain Support

Jayson Derrick

Kraft Heinz Co (NASDAQ: KHC) caught some investors off guard Thursday by delaying its second-quarter results and acknowledging there is "significant work ahead." Shares of Kraft hit a new all-time low and the selling momentum carried over to Friday's session.

Multiple analysts offered their take on Kraft's announcement and among four leading analysts the consensus is clear: investors shouldn't be buyers of the stock at current levels.

Bitter Taste For Long-Term Health

Kraft's report included in-line EBITDA for the first half of 2019 but management's decision to withdraw full-year guidance implies EBITDA pressures, Bank of America's Bryan Spillane wrote in a note. Removing guidance is "harsh" and in part due to the absence of confidence in management's forecasting abilities.

Management hosted a conference call Thursday with four key takeaways, Spillane wrote.

  1. A strategic review of the business will be comprehensive and include supply chain, brands/category.
  2. Efficiency improvements across marketing spending and manufacturing could lift margins.
  3. Management will focus less on "putting on fires" and more on long-term success.
  4. The quarterly dividend can be supported at current free cash flow levels.

Related Link: These Trading Pros Agree: Kraft Heinz's Stock Hasn't Bottomed Yet

Does CEO Patricio Bring The Secret Sauce?

Recently appointed CEO Miguel Patricio boasts the necessary experience in operations, global marketing, and institutional knowledge, UBS analyst Steven Strycula wrote in a note. However, his knowledge stems from his prior role as chief marketing officer at company Anheuser Busch Inbev NV (NYSE: BUD). The CEO is not only shifting from beer to new categories like meat, cheese and nuts but has to address private label competition.

"Our view is that Patricio's 'strategic plan' likely entails a subtle margin rebase as KHC will do its best to fund incremental investment from organization & process inefficiency," Strycula wrote. "Reinvestments will focus on Kraft's largest and most profitable assets (condiments, Philadelphia). And divestitures should target sub-scale brand assets and select commoditized categories."

Stock Debate: Tasty Levels Or Expired Opportunity?

Patricio deserves some credit for his "straight talk" but withdrawing 2019 guidance is a "tactical error," Credit Suisse's Robert Moskow wrote in a note. The CEO's commentary in some ways contradicts his business plan, which implies investors should have a cautious stance on the stock even at all-time lows.

"If "executing the existing 2019 business plan" is still a priority, as Patricio states, and still important internally, why not provide the Street with an update on where it stands like every other consumer staples company?" Moskow wrote.

Kraft Heinz's strategy moving forward is focused more on "spending smarter," which suggests investment dollars allocated to losing businesses will be diverted elsewhere, said Wells Fargo's John Baumgartner. Management is also focusing on a new "modified approach" to product development and consumer insights.

"We see limited incremental downside risks absent another EBITDA re-basing, dividend cut, or dilutive asset sales," Baumgartner wrote. "At this point, we see a low risk of all of the above and while KHC's 5.7% dividend yield is tempting, lingering fundamental weakness and lack of 10-Q filings maintains reduced visibility."

Ratings And Price Targets

  • Bank of America maintains at Neutral, price target lowered from $39 to $32.
  • UBS maintains at Neutral, price target lowered from $35 to $30.
  • Credit Suisse maintains at Underperform, $26 price target.
  • Wells Fargo maintains at Market Perform, price target lowered from $35 to $29.

Price Action

Shares of Kraft Heinz were trading lower by more than 5% Friday at $26.78.

Photo credit: Martylunsford, Wikimedia

Latest Ratings for KHC

Date Firm Action From To
Aug 2019 Reiterates Neutral
Aug 2019 Downgrades Neutral Sell
Jun 2019 Initiates Coverage On In-Line

View More Analyst Ratings for KHC
View the Latest Analyst Ratings

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