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Why Kraft Heinz Stock Looks Unattractive despite ~33% Drop

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What’s hurting the stock?

Kraft Heinz (KHC) stock has plunged about 33% (as of March 8) since it announced its fourth-quarter results on February 21. The packaged food maker’s sales and earnings fell short of analysts’ estimate, which didn’t sit well with investors. Meanwhile, the announcement of a cut in the annual dividend, writedowns on two brands, and an SEC probe further spooked investors.

We expect Kraft Heinz’s sales and earnings to remain under pressure in 2019, which could limit the upside in the stock. Kraft Heinz’s top line is projected to decline on a YoY basis in 2019, reflecting lower pricing, promotions, and increased competition from private-label products. Meanwhile, currency volatility is expected to suppress net sales further.

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Higher manufacturing and transportation costs, promotional spending, and adverse currency rates are expected to hurt Kraft Heinz’s EBITDA, and in turn, its EPS. The company’s earnings are expected to fall, reflecting a decline in profit margins. Also, higher interest expenses are likely to hurt its EPS in 2019.

Inflation in raw material and packaging costs is hurting the profitability of most packaged food manufacturers including General Mills (GIS), Kellogg (K), Hershey (HSY), J.M. Smucker (SJM), and Conagra Brands (CAG). Moreover, earnings remain pressured owing to the increase in interest expenses driven by the debt taken to finance their recent acquisitions.

Valuation summary

Despite the double-digit decline, KHC stock looks unattractive on the valuation front as the weakness in sales and earnings is likely to persist in 2019. Kraft Heinz stock trades at 11.4x its 2019 estimated EPS of $2.82, which looks unattractive given the projected decline of approximately 20% in its EPS in that period.

Kraft Heinz’s EPS is expected to stabilize in 2020. However, the growth rate is likely to remain low.

The graph shows that Kraft Heinz stock erased its gains and is down about 25% on a YTD basis as of March 8. Meanwhile, the stocks of General Mills, J.M. Smucker, and Conagra Brands are up 19.6%, 9.6%, and 5.2%, respectively on a YTD basis. On the contrary, Kellogg stock is down 4.3% so far this year.

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