uploads///Kraft Heinz Stock

Kraft Heinz Stock: Avoid It despite Low Valuation


Aug. 14 2019, Published 11:12 a.m. ET

  • Kraft Heinz stock continued to fall. The company struggled to drive its sales and earnings.
  • Kraft Heinz has a low valuation for a good reason.
  • The company will cut 400 jobs as part of its restructuring program.
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Kraft Heinz stock is still falling

Kraft Heinz (KHC) stock continues to fall as it struggles to stay afloat amid dwindling sales and declining profits. The company’s weak financial performance in the first half of 2019 impacted investors. Notably, Kraft Heinz stock has fallen about 16% since it reported its first-half results on August 8. The stock has fallen about 40% on a YTD basis as of Tuesday.

The stock looks cheap due to the recent decline. However, Kraft Heinz’s valuation is low for a good reason.

Kraft Heinz’s problems compounded when it reported lower-than-expected results for the fourth quarter of 2018 in February. The company’s management announced a dividend cut following prolonged weakness in sales and margins. The disclosure of an SEC probe and $15.4 billion write-downs of two brands also spooked investors.

Kraft Heinz delayed its quarterly results in 2019. When the company finally reported its results for the first half of 2019 on August 8, the stock fell more.

In the first half of 2019, Kraft Heinz’s top line fell about 5%. Meanwhile, the company’s organic sales fell 1.5%. By region, the sales in the US fell 1.9%, while the sales in Canada fell 3.6%. Kraft Heinz’s adjusted EBITDA fell 19.3% in the first half of 2019. The company’s adjusted EPS fell 24%.

Kraft Heinz struggled to boost its financial performance. As a result, the company embarked on a restructuring plan to reduce its workforce. In a regulatory filing on Tuesday, Kraft Heinz announced that it will cut 400 jobs. The company stated that it cut 200 positions as of June 29.

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Why avoid the stock?

We don’t expect Kraft Heinz’s problems to end soon. Lower pricing and competitive headwinds will likely drag the company’s sales down. Cost pressure and inventory reductions by retailers will likely hurt the company’s EBITDA and EPS.

Analysts expect Kraft Heinz’s revenues to mark a low to mid-single-digit decline in the second half of 2019. The company’s sales will likely stay weak in 2020. Soft sales and the lower EBITDA could take a toll on the company’s future earnings. Analysts expect a strong double-digit decline in Kraft Heinz’s earnings in the second half of 2019. The EPS will likely fall in the first half of 2020 as well.

Kraft Heinz stock is trading at a multiyear low valuation. The stock is trading at a forward PE ratio of 10.2x, which is roughly 50% lower than its historical average of 20.5x. Despite the low valuation, persisting challenges, lower sales, and the weak EPS outlook, the stock isn’t attractive.

Several analysts also lowered their target price on Kraft Heinz stock, which reflected near-term challenges. Berenberg reduced the target price to $30 from $41. BofA Merrill Lynch lowered the target price to $32 from $39. UBS and Stifel have a target price of $30—down from the previous target price of $35. Guggenheim downgraded Kraft Heinz stock to “sell” from “neutral” and reduced the target price to $25 from $29. Evercore ISI cut its target price to $30 from $32.


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