The boys from Brazil’s 3G Capital had a simple idea. They would buy established brands, cut costs through zero-based budgeting, then buy more. At the heart of this plan, with the blessings of Warren Buffett, was Kraft Heinz (NYSE:KHC), which they created through a 2015 merger.
The plan worked when established brands flourished despite the cost cuts. But shoppers no longer want the same-old anything, and Kraft Heinz stock has suffered.
The company announced ssecond-quarter earnings Aug. 3, with investors expecting 91 cents per share of earnings, about $1.13 billion, and hoping for 93 cents, on $6.6 billion in revenue. Instead, the company announced earnings of $756 million, 62 cents per share fully diluted, on revenue of $6.68 billion. The top line was solid, the bottom line was light.
Cost increases, the company said. Still, its spin on the numbers — cost increases are temporary and sales should now grow thanks to new products and marketing — encouraged investors, who quickly bid up KHC stock to over $63 per share from its Aug. 2 close of $59.40.
Fighting for the Center
Kraft Heinz is in the “center of the store,” in grocery industry parlance. Its non-perishable products are sold in the center aisles of grocery stores, most of whose profit is now made at the edges, in fresh produce and prepared meals.
This has discouraged 3G from its usual practice of buying other, similar companies. The company passed on Pinnacle Foods (NYSE:PF) and is reportedly avoiding Campbell Soup (NYSE:CPB), and it’s instead launching an incubator to create new products like Poppilu, a healthier lemonade.
The company has also committed to making all its packaging recyclable by 2025 and launched a deal with the Food Network to make sauces, salad dressings and meal kits.
The shares are down over 30% in the last year, but that has just made its dividend of $2.50 per year look better to income investors. The yield is about 3.8% at its current price. This has put a floor under the stock price, where any claims of organic growth could cause a pop.
That’s what Kraft Heinz is delivering, albeit outside the U.S., where sales were down $88 million year-over-year. Sales in Europe, the Middle East and Africa were up almost 9%, and those to Latin America and Asia were up 13.5%.
Investors Seek Value
The fall of the stock has given it an attractive technical chart for bargain hunters and the promises of organic growth, along with the market’s new preference for value stocks that deliver dividends, were enough to give the stock a lift after earnings.
Those growth promises must become reality, however, because retail investors are getting antsy. Jim Cramer told them in June to sell if KHC hit $64, then said in July they should hold it and wait for the shares to hit $70.
Bottom Line on KHC Stock
Most analysts are looking for an acquisition to be the catalyst for new growth, running the regular 3G playbook, but management has changed the game plan, preferring to build new companies that can deliver small hits to revenue rather than big deals that deliver large ones.
For me, this is a disconnect, where management is saying one thing and investors expecting another.
Personally, I am a big fan of 3G. I own another of their creations, Restaurant Brands (NYSE:QSR), which owns Burger King, Tim Horton’s and Popeye’s. When they tell me to expect slow, organically-driven growth, I believe them.
At least there’s always the dividend yield.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in QSR.
