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No Amount of Ketchup Can Help the Flavor of Kraft Heinz Co

Kraft Heinz stock - No Amount of Ketchup Can Help the Flavor of Kraft Heinz Co

Source: Mike Mozart via Flickr

Kraft Heinz Co (NASDAQ:KHC) has started building a new history as two established, venerable American brands join forces to face today’s marketplace. However, the growth of this partnership has hit a significant dip as the stock has fallen to 52-week lows. Growth levels have stagnated, and many customers have moved away from the packaged foods that characterize both Kraft and Heinz. Now that the honeymoon phase of the Kraft-Heinz marriage has ended, the company must adapt to a new marketplace if it wants to thrive again.

Kraft and Heinz merged in 2015 to form Kraft Heinz Co. This created the third largest food and beverage company in North America. In addition to the brands that bear the company name, Oscar Mayer, Planters, and Ore-Ida are among the brands that exist under the KHC umbrella.

Investors who do not perform due diligence might assume that because people always have to eat, they will buy products from KHC in good times and bad. Unfortunately for KHC, this is not the case. Kraft Heinz stock is being hurt by the same trend that’s troubling peers such as Conagra Brands Inc (NYSE:CAG), General Mills, Inc. (NYSE:GIS), Kellogg Company (NYSE:K), and Campbell’s Soup Company (NYSE:CPB).

Both e-commerce and an increased emphasis on local and organic food has brought increased competition to large food companies. With e-commerce, people have more ability to buy from smaller food companies. Increasingly, consumers are also avoiding packaged foods with ingredient labels that only PhD-level biochemists can understand. They now want foods that are fresh and locally-grown.

Kraft Heinz Stock Dividend May Be Threatened

This trend away from packaged food has shown up in the declining revenue numbers of most of its peers. KHC has somewhat escaped this trend. Revenues in 2017 saw a slight decline from 2016 levels. Analysts forecast that revenue for Kraft Heinz stock will increase to 1% to 2% each year over the next two years. This will help keep the company stable. However, the company will need higher levels of growth to assure investors that the market has not moved away from Kraft Heinz products.

The stock has seen a brutal downtrend over the past 12 months. The stock had traded at almost $94 per share ten months ago. Today, it has fallen below $60 per share and now trades at a forward price-to-earnings (PE) ratio of 16. With better growth levels, I’d consider this a fair valuation. However, with flat growth that could easily turn negative, I have a hard time recommending Kraft Heinz stock.

Even its dividend, which looks impressive at first glance, is not enough. The dividend yield has increased to around 4%. This payout has also increased every year since Kraft and Heinz merged and now stands at $2.50 per share. However, analysts estimate consensus earnings of $3.82 per share. Any sustained downtrend in earnings cut puts the dividend in danger.

Annual dividend increases have also come to characterize the stocks of many consumer defensive companies. Any dividend cut or even a refusal to increase will signal weakness to the market. So, a dividend which at first glance might attract investors to KHC stock instead serves as a negative catalyst.

Bottom Line on Kraft Heinz Stock

The marketplace has turned away from the packaged foods that characterize Kraft, Heinz, and the brands that the company owns. This preference for fresher foods has caused growth levels to stagnate. Unfortunately for KHC investors, the flat growth has greatly hurt its stock and the prospects for the company.

My colleague Lawrence Meyers calls KHC  “a sunset stock in a sunset industry.” This industry has plenty of time to adapt. For that reason, I’m not going to agree. I also think these companies will still find buyers for their products. However, with the dangers that KHC and its peers face, I will need to see single-digit PE ratios and a path to sustained profit increases before I will recommend Kraft Heinz stock or the stock of its peers.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


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