Key Morningstar Metrics for The Kraft Heinz
What We Thought of The Kraft Heinz’s Earnings
Kraft Heinz’s second-quarter organic sales sank 2%, while adjusted operating margin plunged 120 basis points to 20.1%. However, the firm held the line on full-year expectations for a 1.5% to 3.5% decline in organic sales against $2.51-$2.67 in adjusted EPS.
Why it matters: Even as value-seeking consumers tighten their purse strings and an appetite for healthier fare impedes center-store categories, we think Kraft Heinz is adeptly focused on investing in its brands and capabilities to support the business over the long term.
- We forecast it will direct 6% of sales to research, development, and marketing annually through fiscal 2034. To fuel this, management is prudently focused on driving efficiencies, in our view, with $1.7 billion of cost savings realized to date out of the $2.5 billion target by fiscal 2027.
- The fruits of these efforts can be seen in the sequential improvement in four of its languishing brands–Capri Sun, Lunchables, Kraft Mayo, and Kraft Mac and Cheese–which all touted dollar sales gains relative to the first quarter on enhanced flavors, packaging, and communication.
The bottom line: We don’t plan a change to our $51 fair value estimate for narrow-moat Kraft Heinz, beyond time value.
- Shares trade about 40% below our intrinsic valuation, after barely budging on the news. We suspect the market’s concerns center around the potential for a lasting volume contraction on persistent inflation pressures, waning consumer spending, and intensifying competition.
Between the lines: While speculation continues to circle surrounding Kraft Heinz’s portfolio restructuring intentions, we don’t surmise that a split of the business would guarantee a value unlock, given the potential for added costs.
- A potential split could result in Kraft Heinz’s sauces, condiments, meals, and snacking brands ($8.5 billion in annual sales) garnering a high-teens EBITDA multiple versus a low-teens valuation for its commoditized coffee, meats, and cheese fare.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
The author or authors do not own shares in any securities mentioned in this article.
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