The Kraft Heinz Co (NASDAQ:KHC) experienced a daily gain of 1.38%, although it recorded a 3-month loss of 3.19%. With an Earnings Per Share (EPS) of 2.56, the question arises: Is the stock modestly undervalued? This article aims to provide a detailed valuation analysis of The Kraft Heinz Co, offering insights into its intrinsic value and potential for future returns. Let's delve into the specifics.
In July 2015, Kraft merged with Heinz to create the third-largest food and beverage manufacturer in North America, and the fifth-largest player globally. The Kraft Heinz Co's portfolio includes renowned brands like Oscar Mayer, Velveeta, and Philadelphia, with retail channels driving around 85% of its total sales. The company also operates a growing presence in the foodservice arena. Globally, Kraft Heinz's distribution network in Europe and emerging markets accounts for 20%-25% of its consolidated sales base, selling its products in over 190 countries and territories.
At its current price of $34.49 per share, The Kraft Heinz Co has a market cap of $42.40 billion. When compared to its GF Value of $38.76, the company appears to be modestly undervalued. But what does this mean for potential investors? Let's explore further.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated based on historical multiples, a GuruFocus adjustment factor based on past returns and growth, and future estimates of business performance. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
The Kraft Heinz Co's stock appears to be modestly undervalued based on the GuruFocus Value calculation. Because The Kraft Heinz Co is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
Evaluating Financial Strength
Assessing a company's financial strength is crucial before investing. Companies with poor financial strength pose a higher risk of permanent loss. A great way to understand a company's financial strength is by looking at the cash-to-debt ratio and interest coverage. The Kraft Heinz Co has a cash-to-debt ratio of 0.05, which is worse than 87.1% of the companies in the Consumer Packaged Goods industry. The overall financial strength of The Kraft Heinz Co is 5 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. The Kraft Heinz Co has been profitable 9 out of the past 10 years, with an operating margin of 18.38%, which ranks better than 90.78% of companies in the Consumer Packaged Goods industry. Overall, the profitability of The Kraft Heinz Co is ranked at 7 out of 10, indicating fair profitability.
Growth is a critical factor in the valuation of a company. The 3-year average annual revenue growth rate of The Kraft Heinz Co is 1.9%, which ranks worse than 66.71% of companies in the Consumer Packaged Goods industry. The 3-year average EBITDA growth rate is -1.4%, which ranks worse than 62.91% of companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. The ROIC of The Kraft Heinz Co was 4.8 over the past 12 months, while its WACC was 5.1. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders.
Overall, The Kraft Heinz Co (NASDAQ:KHC) stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 62.91% of companies in the Consumer Packaged Goods industry. To learn more about The Kraft Heinz Co stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.