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Can Kraft Heinz's Potential Sale of Breakstone's Aid Growth?

Zacks Equity Research

The Kraft Heinz Company KHC is focused on reviewing its operations. Per sources, the company is exploring various strategic options for its Breakstone's sour cream and cottage cheese business.

Evidently, Kraft Heinz has appointed Royal Bank of Canada to assess alternatives for the aforementioned business, which could also involve a potential divestiture, per media reports. We note that the Breakstone's sour cream and cottage cheese business could be valued at approximately $400 million.

This seems to form part of a wider analysis of Kraft Heinz’s dairy business that incorporates the natural cheese business as well. Incidentally, Kraft Heinz announced a deal to divest its Canadian natural cheese business to Parmalat, in November 2018. The sale is anticipated to conclude in the first half of 2019.

Moreover, there were hearsays about Kraft Heinz considering selling its Maxwell House coffee business. Coming back to yesterday’s development, Breakstone's could attract dairy firms such as Dairy Farmers of America and Dean Foods DF, among others. These moves, if materialized, would reflect Kraft Heinz’s efforts to optimize its portfolio by shifting focus to key categories and brands with higher growth potential.

This may also help the company revive investors’ confidence. Well, this Zacks Rank #5 (Strong Sell) stock has plunged close to 32% in the past three months, wider than the industry’s decline of 4%. We note that the company recently posted fourth-quarter 2018 results, wherein the bottom line tumbled 6.7% year over year, owing to lower adjusted EBITDA, elevated interest costs, and greater depreciation and amortization expenses.

Notably, adjusted EBITDA was down 13.9% to $1,699 million in the quarter, with currency playing a spoilsport to the tune of nearly 2.4 percentage points. Excluding currency, softness in adjusted EBITDA was mainly driven by weakness in the United States, wherein lower-than-expected savings, and high manufacturing and logistic expenses were deterrents.

Further, management expects the company’s adjusted EBITDA to decline at a high-teens rate in the first quarter of 2019, owing to cost inflation and planned commercial expenditure. Moreover, in 2019, earnings are likely to remain pressurized by soft EBITDA, increased depreciation costs and elevated interest costs, among other factors.

Nonetheless, Kraft Heinz has solid innovation initiatives planned in the foodservice space to fuel growth across all regions. To this end, the company unveiled an alliance with online grocer, Farmstead, earlier this month. The deal will bring Kraft Heinz’s solid assortments like Heinz Ketchup, Kraft Mac & Cheese and Philadelphia Cream Cheese, among others, to Farmstead’s customers. While the partnership will strengthen Farmstead’s inventory, it will help Kraft Heinz reach more consumers through the convenience of online order and delivery.

Let’s see if these efforts can help the stock witness a turnaround.

Don’t Miss These Solid Food Stocks

Medifast MED, with long-term EPS growth rate of 20%, flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

General Mills GIS, a Zacks Rank #2 (Buy) stock, has long-term EPS growth rate of 7.3%.

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