Kraft Heinz Stock: Will Q3 Earnings Spur a Recovery?

  • Kraft Heinz is scheduled to announce its third-quarter earnings on October 31.
  • Kraft Heinz stock could remain pressured.
  • An acceleration in the EPS decline rate will likely hurt the recovery process.
  • The company’s revenues might continue to decline.

Kraft Heinz (KHC) is scheduled to report its third-quarter earnings before the markets open on October 31. We expect the company to post weak third-quarter results, which could restrict the recovery in the stock. We think that higher competition from private-label products, increased promotions, and lower net selling prices could hurt the company’s top-line growth.

Kraft Heinz’s profit margins might continue to slide, which reflects lower pricing and increased supply-chain costs. Sluggish sales and tepid margins will likely drag the company’s third-quarter earnings down. Notably, analysts’ consensus estimate indicates that the EPS decline rate will likely accelerate sequentially, which could hurt the stock.

However, the downside risk seems limited based on the considerable decline in Kraft Heinz stock. The company’s multiyear low valuation and high dividend yield could provide support.

Kraft Heinz’s third-quarter estimates

Analysts expect Kraft Heinz to post revenues of $6.14 billion, which reflects a decline of 3.8% YoY (year-over-year). Notably, the company’s top line fell 5% in the first half of 2019. Lower shipment volumes and pricing and more competition from private-label products remained a drag. Meanwhile, currency volatility pressured the top line. Kraft Heinz’s organic sales fell 1.5% in the first half of 2019.

Analysts expect lower sales and higher promotions to hurt the company’s third-quarter EBITDA. Analysts project about a 13% decline in Kraft Heinz’s EBITDA in the third quarter. However, the company’s EBITDA fell 19.3% in the first half of 2019.

Overall, lower sales and margins combined with higher interest expenses and taxes will likely to drag the company’s earnings down. Analysts expect Kraft Heinz to post an adjusted EPS of $0.54, which implies a decline of about 31% YoY. The projection reflects a sequential acceleration in the company’s EPS decline rate. In the first half of 2019, Kraft Heinz’s bottom line fell 24%.

In comparison, analysts expect Hershey’s (HSY) third-quarter revenues to increase 2.1%. The company’s bottom line will likely increase 3.3% due to share buybacks and a lower tax rate. Hershey is scheduled to announce its third-quarter earnings on Thursday.

Kraft Heinz’s stock performance

Kraft Heinz stock has been a disaster for investors. The stock fell 45% in 2018. So far, the stock has fallen about 35.4% this year. Kraft Heinz stock’s underperformance eroded a significant amount of investors’ wealth—including legendary investor Warren Buffett. Warren Buffett’s Berkshire Hathaway is the largest investor in Kraft Heinz.

The stock has fallen about 52% from its 52-week high of $58.08. The stock is trading about 12% higher than its 52-week low of $24.86.

In comparison, other major food stocks performed exceptionally well. Hershey stock has risen 43.3% YTD as of Monday. At the same time, Campbell Soup (CPB), General Mills (GIS), and Conagra Brands stocks have risen 45.2%, 34.8%, and 28.6%, respectively.

Considering the significant decline, Kraft Heinz stock trades at a low valuation multiple. However, the company’s low valuation probably won’t drive a recovery. The stock offers a dividend yield of 5.8%, which seems high given the considerable amount of decline in the stock price.