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Kraft Heinz Stock Rose 9% in September: Time for a Pullback?

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Oct. 2 2019, Published 12:26 p.m. ET

  • Kraft Heinz stock rose 9% in September despite its second-largest investor reducing its stake.
  • The stock will likely underperform in the short term.
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Kraft Heinz stock rose in September

Kraft Heinz (KHC) shares recouped some of the losses and rose about 9% in September. Surprisingly, the stock registered gains even though 3G Capital Partners, its second-largest investor, lowered its stake in the company. 3G Capital sold about 25.1 million of Kraft Heinz stock for $28.44 and reduced its stake to about 20%.

In general, an investor reducing stake isn’t a good sign. Currently, the company is struggling to stay afloat. The move followed Kraft Heinz’s underperformance in the past several quarters. Moreover, the company’s dismal performance in the first half of the year eroded investors’ wealth.

Kraft Heinz’s top line fell 5% in the first half of 2019, which reflected weak underlying or organic sales. The company is losing compared to its competition. The company wants to focus on higher promotions to boost sales. Lower pricing amid increased promotions impacts the company’s profitability. In the first half of the year, Kraft Heinz’s adjusted EBITDA fell 19.3%. Weak sales and lower margins dragged the earnings down. The company’s earnings have fallen nearly 24% YoY (year-over-year).

Notably, 3G Capital Partners sold nearly 20.6 million Kraft Heinz stock for $59.85 last year.

Is it time for a pullback?

Kraft Heinz’s problems probably won’t end soon, which could continue to pressure its stock in the short term. Analysts’ consensus estimates indicate that the company will disappoint investors in the second half of the year too. Analysts expect Kraft Heinz’s revenues to continue to fall in the near term—at least until the first half of 2020. The company’s EPS will likely fall more in the third quarter.

After a 24% drop in Kraft Heinz’s earnings in the first half of the year, analysts expect its bottom line to mark about a 30% decline in the third quarter. Moreover, the EPS will likely stay low in the fourth quarter and fall 25%.

Kraft Heinz stock is trading at a multiyear low valuation—roughly ten times its forward earnings estimate. Meanwhile, the steep decline in the stock price led to a higher dividend yield despite a cut in the dividend.

The company’s high dividend yield and low valuation probably won’t support its stock. The lack of growth could continue to drag the stock down. Any recovery in Kraft Heinz stock could be an exit opportunity until visibility improves for the sales and earnings.

Kraft Heinz shares have fallen 36.5% YTD (year-to-date). The shares are lagging the benchmark index by a wide margin.

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