Kraft Heinz Stock: Q3 Might Not Help Bulls or Bears

  • We expect sluggishness to continue in the third quarter, which rules out the bull case.
  • Kraft Heinz bears probably won’t gain much. The downside seems limited in Kraft Heinz stock. The share price reflects negatives.

What to expect from Kraft Heinz

Kraft Heinz (KHC) will report its third-quarter earnings on Thursday. Betting on Kraft Heinz stock before the earnings might not help the bulls and bears. We expect Kraft Heinz’s sluggishness to continue in the third quarter. The company’s sales, margins, and EPS will likely stay low. While weak financials won’t help bulls, the reduced risk in Kraft Heinz stock indicates that bears won’t gain much from the weakness.

So far, Kraft Heinz stock has taken a beating this year. The stock has fallen about 35% on a YTD (year-to-date) basis as of Tuesday, which indicates limited downside risk. Also, markets expect Kraft Heinz to have disappointing third-quarter sales and earnings, which implies less pressure on the stock. However, an acceleration in the pace of the EPS decline could remain a drag.

Kraft Heinz stock closed at $28.14 on Tuesday, which implies a decline of about 50% from its 52-week high of $56.50. Moreover, the stock is trading about 13% higher than its 52-week low of 24.86.

Analysts’ expectations in Q3 

Analysts expect Kraft Heinz’s revenues to continue to fall in the third quarter. The company is losing market share to private-label products. Kraft Heinz is relying on promotions to drive the top line, which will hurt its sales growth. The company’s organic sales will likely fall due to lower pricing from promotions and soft volumes.

Analysts expect Kraft Heinz to post revenues of $6.13 billion in the third quarter, which implies a YoY decline of about 4%.

In comparison, other major food companies are gaining from expanding into the frozen and snacks category. Also, a higher net price realization is driving organic sales. For example, Kellogg’s (K) posted organic sales growth of 2.4% due to higher net pricing. Kellogg’s beat analysts’ revenue and EPS estimates. However, Kellogg’s revenues and earnings fell on a YoY basis, which reflected divestitures, negative currency rates, and input cost inflation.

Meanwhile, Hershey’s (HSY) top line also gained from higher net pricing. During the third quarter, Hershey posted revenues of $2.13 billion—up 2.6% YoY. Pricing contributed about 1.1% to the net sales growth. Hershey’s gross margins improved by 80 basis points due to the benefits of higher pricing.

Lower pricing, promotions, and higher costs will likely drag Kraft Heinz’s margins and EPS down. Analysts expect the EPS to fall at a faster pace in the third quarter. Notably, analysts expect Kraft Heinz to post an adjusted EPS of $0.54—down about 31% on a YoY basis. The company’s adjusted EPS fell 24% in the first half of 2019.