I didn’t think it could get much worse for Kraft Heinz (NASDAQ:KHC), but it did. Standard and Poor’s put the company on CreditWatch negative for failing to file its annual report with the SEC. Down went Kraft Heinz stock hitting a 52-week and all-time low.
Source: Mike Mozart via Flickr
If there was any doubt that KHC was in the fight of its life, yesterday’s dressing down by the credit rating agency is a glaring illustration of how far it has fallen in the past 12-24 months.
So, why then did I recently pen 7 Reasons Kraft Heinz Stock Is a Contrarian Buy?
Because despite everything, I do believe that Kraft Heinz can be turned around — but only if these three things are done by the end of 2019.
Restore the Balance Sheet
Companies that get put on CreditWatch negative are often downgraded (50% chance) within 90 days of going in the credit rating doghouse. While the optics of a $39 billion market cap getting downgraded stings, the financial implications are much worse.
In the case of Kraft Heinz, it has way too much debt. As I stated in my February article about Kraft Heinz stock being a contrarian buy, the company has long-term debt of $30.9 billion and just $1.1 billion in cash. With almost no free cash flow, it’s going to have to sell some of its brands to pay down debt.
Consider this, while Kraft Heinz’s long-term debt is 79% of its market cap, General Mills (NYSE:GIS) has $12.2 billion in long-term debt or 43% of its market cap. Despite making a game-changing acquisition of Blue Buffalo last year for an eye-popping $8 billion, its balance sheet is still much stronger than Kraft Heinz’s.
Get that down below 50% and investors will warm to Kraft Heinz stock.
Fire the CEO
I read a great article recently by Forbes contributor Rober Wolcott that talks about Kraft Heinz’s controlling owners, 3G Capital, needing to step up to the plate and lead with courage. Walcott wrote March 15:
“It’s not too late for Kraft Heinz. I personally know some talented executives still with the company. Their iconic brands haven’t vanished, but even icons need to continually earn relevance.…To return to growth, Kraft Heinz must turn their cost obsession into prudence and recognize that long-term prosperity requires long-term investment.”
Easier said than done. Once a cost cutter, always a cost cutter.
However, if it doesn’t want to lose investors completely, it’s got to reverse course immediately.
The best way to do that is to fire existing CEO Bernardo Hees, a 3G lieutenant, and replace him with someone who’s got a long history of product innovation and rarely if ever worked for a cost cutter.
“Any CEO can decide to think long term. I think it is courageous leadership that is missing.”
Wolcott’s right. Kraft Heinz is missing courageous leadership. It needs that now more than ever.
Focus on Power Brands
First, I would identify the top brands by revenues and operating profits. There’s no point putting money and effort into a brand that’s only got $200 million in sales and is barely profitable. On the other hand, a brand with the same amount of revenue, but good growth prospects and higher operating profits, is worth keeping.
Secondly, I wouldn’t hesitate to sell both the Kraft and Heinz brands if the writing is on the wall. That said, I doubt either brand is ready for the trash bin. But don’t be afraid to make the big decisions even if it means giving up part of your history.
Third, I would pour more money into Springboard, Kraft Heinz’s platform for growth.
3G Capital are private equity investors. They, more than most, should understand the idea of making an acquisition that becomes the foundational piece of a new growth platform.
Little investments can grow into big ones over time. Think 10-20 years down the road and innovation becomes an everyday thought.
The Bottom Line on Kraft Heinz Stock
Warren Buffett, who I respect immensely, has fallen down on the job when it comes to Kraft Heinz.
Not so much because of the losses his company’s taken as a result of Kraft Heinz’s deteriorating business, but because he’s failed to push for change when change is so obviously needed.
He’s a loyal person so that might be tough but if Kraft Heinz doesn’t do all of the above — and soon — it’s long-term health is very much in question.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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