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Kraft Heinz (KHC) Stock Continues to Fall: When Will the Bleeding Stop?

Christopher Vargas

Kraft Heinz KHC shares closed down 0.53% through intraday trading Monday as the stock continues to plummet following the release of its earnings report. The consumer-packaged goods company posted its first-half results last Thursday and the less than stellar report sent the stock plummeting by as much as 13%.

KHC’s quarterly filing was delayed amid a Securities and Exchange Commission investigation into the company’s accounting and procurement practices. The stock has been pummeled in 2019, down 39% year-to-date. Kraft Heinz’s downturn Monday brought it to a new all-time low.

First Half Performance

Kraft Heinz’s 2019 struggles led the firm to hire former marketing executive Miguel Patricio as CEO, in an effort to switch its focus from cost-cutting to growing brands like Oscar Mayer, Velveeta, and Jell-O. Patricio was formerly the chief marketing officer of Anheuser-Busch InBev BUD and KHC hopes his brand-building skills will be able to revitalize growth.

On Thursday, the new CEO said he was unable to provide financial guidance for investors, citing his limited time as Kraft Heinz’s chief executive as the contributing factor. The refusal to provide financial guidance further frustrated shareholders who had gone six months without a quarterly filing, and hoped they would finally gain more insight into the firm’s recovery plans. On top of all that, Kraft Heinz cut its dividend in February of this year by 36%.

In its preliminary second-quarter results, KHC announced that its net income in the first half of 2019 came in at half the prior-year period’s levels. KHC said it would write down the value of its eastern emerging markets, Brazilian, U.S. refrigerated and Latin America exports businesses by about $744 million. The company also recorded a $474 million write down of its Miracle Whip, Velveeta, Lunchables, Maxwell House, Philadelphia, and Cool Whip brands. Plus, KHC hired an investment bank to explore options for a sale of its Maxwell House brand but has received lackluster interest from investors thus far.

KHC reported EPS of $0.78, which beat our estimate by 4%. But its reported revenue of $6.41 billion fell short of our estimate by 3.6%. Revenue in the first half of 2019 fell 4.84% to $12.37 billion and the company’s profits plummeted 51.48% to $852 million. U.S. revenue fell 1.9% to $8.71 billion, while Canada dropped 3.6% to $1.01 billion. Additionally, EMEA tumbled 10.2% and the rest of the world revenue sunk 16.8%.

Second Half Outlook

The company’s inability to provide financial guidance for the second half of 2019 left investors wondering what the true value of Kraft Heinz’s brands are, and just how much more value they might lose. Consensus Estimates project KHC’s earnings to drop 20.51% to $0.62 per share and for revenue to tumble 1.94% to $6.25 billion in Q3.

U.S. revenue is forecasted to slightly increase from the year ago quarter to $4.46 billion. Meanwhile, Canadian revenue is expected to drop 20.2% to $419 million, while EMEA revenue is set to gain 1.75% to $640 million. Full fiscal year estimates predict further year over year falls for KHC. The company’s bottom line is expected to take the brunt of the hit, with earnings projected to fall 22.38% to $2.74 per share. Total revenue is projected to sink 1.59% to $25.84 billion.

Long-Term Worries

Kraft Heinz is currently listed as a Zacks Rank #3 (Hold). Kraft Heinz’s product portfolio is full of processed food brands that are seemingly out of touch with many of today’s consumers. Most of the company’s sales are tied to the U.S. at a time when international growth has become pivotal for many company’s success.

The likes of Mondelez MDLZ have been able to capitalize in the international market, which in turn has helped the MDLZ stock soar 35.7% YTD, outpacing the broader food market industry. Kraft Heinz struggles with its earnings and revenue growth have made investors steer clear of the stock.

KHC’s third quarter and full year outlook doesn’t provide many incentives for investors to try to buy the stock at its discounted price. Furthermore, companies like General Mills GIS, Campbell CPB, and Kellogg K have been able to adapt to the health-conscious consumer landscape resulting in them having better returns than KHC thus far in 2019.

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