Kraft Heinz (KHC 34.58, -13.60, -28.23%) is hitting all-time lows
after disclosing a slew of bad news last night. That is an enormous move for a
well-established large-cap consumer packaged goods company.
Fourth quarter sales grew 0.7% but missed estimates for the sixth time in the last eight quarters. Organic sales grew 2.4% vs. 2.6% in the third quarter. Volume growth of 4% was offset by a 1.6% pricing headwind and 2.2% foreign exchange headwind
Adjusted EPS fell 7%, missing estimates for the second quarter in a row. Adjusted EBITDA fell 14%, missing estimates for the seventh time in the last nine quarters.
Most notably, Kraft Heinz reported a $12.6 bln net loss for the quarter including a whopping $15.4 bln write-down related primarily to the Kraft and Oscar Mayer brands. The massive write down of goodwill acknowledges the secular headwinds the company is facing.
Kraft Heinz is struggling with changing consumer preferences. The trend toward healthier, organic, locally produced, and sustainable foods isn't going away anytime soon. The company owns brands like Oscar Meyer, Kool-Aid, Jell-O, and Velveeta, which are iconic, but don't necessarily jive with the current trend in food. Younger generations are generally much more critical about what they consume. For example, Kraft cheese singles' longevity made them a staple in decades past, but younger generations are looking for natural, healthier, artisanal offerings instead of food filled with artificial ingredients and preservatives.
The entire consumer packaged goods industry is facing these headwinds but KHC is feeling it especially hard after Kraft and Heinz merged in 2015 with the help of Warren Buffet's Berkshire Hathaway and the Brazilian private equity firm 3G Capital. Warren Buffet obviously draws a huge following as the most legendary investor of all time. Meanwhile, 3G was known for its disciplined operational capacity focused on driving productivity (cost cuts).
The merger hasn't played out as many would've expected due to the company's product portfolio which appears to be not very well positioned given the aforementioned secular headwinds in the sector. Berkshire Hathaway owns just under 27% of the company and 3G owns 22% of the company.
Kraft Heinz guided for fiscal 2019 EBITDA of $6.3-6.6 bln, missing estimates by nearly $1 bln.
To make matters worse, the company disclosed a SEC investigation regarding its procurement practices. The company also cut its quarterly dividend 36% to $0.40/share.
Kraft Heinz has a ~$43 bln market capitalization and ~$30 bln in net debt. The stock has a 4.6% dividend yield.
Management said it wanted to reduce leverage in order to participate in further industry consolidation. While improving the product portfolio would be a good thing, the market doesn't seem very keen on another big deal after the last one failed to pan out.
Seven firms have downgraded the stock this morning.
Kraft Heinz is now trading at less than 12x EV/EBITDA and 13x EPS estimates for 2019. That makes it one of the cheapest stocks in the consumer packaged goods sector, which trades at 15x EV/EBITDA ~20x EPS on average.
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