Kraft-Heinz Is On The Verge Of A Multiple Expansion
We have been predicting a massive multiple expansion for shares of Kraft-Heinz (NASDAQ: KHC) stock for some time now. That expansion begins with the company’s uber-low 12.5X valuation and ends with the turn-around story that is now gaining traction. Kraft-Heinz has been shedding underperforming assets, shoring up the balance sheet, and targeting the next round of winning brands and it has already begun to buy them.
Trading at only 12.5X its earnings it is a value relative to the broad market but, more importantly, to its peers that trade in the range of 25X to 30X their earnings. More importantly, Kraft-Heinz is paying 4.5% in dividend yield compared to 1.1% for the broad market and in the range of 2.0% for its peers, and we see a growing chance for distribution increases to come back into the picture. And when it does, if they haven’t started before, the analysts are going to start upgrading this stock and accelerate the reversal that is already underway. For now, the consensus is a Hold which is good enough.
Meanwhile, the institutions are slowly gobbling up this stock and we think that activity will accelerate now that Q4 earnings are out. The institutions have purchased a net $2 billion worth of stock over the past year, worth about 4.7% of the market cap, and their activity picked up in the first quarter of 2022. Institutional buying in Q1 is worth $0.57 billion or about 1.3% of the market cap and they are still buying.
Kraft-Heinz Outperforms At All Levels
Kraft-Heinz put in a good quarter despite the impact of divestitures over the past year. The company reported $6.71 billion in net sales which is down 3.3% versus last year but 120 basis points above the consensus. The revenue reflects a 730 basis point impact from divestitures which leaves organic sales up in all categories. On an organic basis, sales in the US are up 3.0%, International sales are up 4.0%, Canadian sales are up 5.2%, and sales in the core Kraft-Heinz portfolio are up 3.8%. The only downside is that organic gains are driven by pricing increases that range from 3.0% to 5.2% by category.
Moving down, the company did experience some margin pressure but was able to mitigate a large portion of it via price increases. On a GAAP basis, net income shows up as a loss due to divestitures, impairments related to early debt repayment, and unrealized gains related to commodity hedges. When adjusted for those items, the company’s EBITDA rose on a YOY basis and left EPS well above expectations. On the bottom line, the adjusted $0.79 is down $0.01 from last year but beat the consensus by $0.16 and the outlook for earnings is positive.
While YOY growth is expected to return in the Q1 period, growth for the year will be tepid in the low single digits. The good news is that we expect to see margin expansion in the first half due to higher pricing and for margin expansion in the second half due to moderating input costs.
The Technical Outlook: Kraft-Heinz Is In Reversal
Shares of Kraft-Heinz corrected from their post-COVID peak and are now ready to move higher again. Price action has confirmed support at the key $35 level and is indicating a continuation of the reversal that began late in 2021. The next hurdle for the market to overcome is at the $38 level but, once overcome, a move to $44 should follow soon after. Longer-term? We see this stock moving back up to the $80 to $90 range or more than 100% higher than where it is trading now.
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