The food trends that have hurt Kraft Heinz (NYSE:KHC) finally showed up in the balance sheet. KHC stock tanked almost 28% on Friday as write-downs and a dividend cut overshadowed poor fourth-quarter earnings and revenue numbers.
To say investors should avoid KHC stock is an understatement. Not only will this keep the Velveeta maker depressed for some time to come, but it also undermines long-held assumptions of what constitutes a stable, recession-proof stock.
Kraft Heinz Stock Missed on Nearly Every Level
For Q4, Kraft Heinz reported non-GAAP earnings of 84 cents a share, which was 10 cents below estimates. The company earned 90 cents per share in the same quarter last year. Likewise, revenues of $6.89 billion iked out a 0.7% improvement year-over-year but fell short of Wall Street expectations by $50 million.
But what really got investors selling was the company’s disclosure that the Securities and Exchange Commission (SEC) is investigating KHC’s accounting and procurement practices. The SEC alleges higher ingredient costs and other expenses that the company should have recorded in past quarters.
The pain did not end there. The company also reported write-downs of $15.4 billion in goodwill and intangibles related to Kraft brands and Oscar Meyer. Sales declines have affected both brands for several years. Though profits have recently begun to improve, lowered margins still reduced their value.
Moreover, the company cut its quarterly dividend, paring it to 40 cents per share from the previous 62.5 cents. Management expects the reduced payout will better position the company for industry consolidation. Factoring in these adjustments, the quarterly loss comes to a staggering $10.34 per share.
Investors Must Rethink Perceptions of Food Stocks
In numerical terms, we are now seeing the shifting preference to fresh food show up in the numbers. For decades, Kraft Foods and H.J. Heinz had thrived in good times and in bad as their products remained staples in American households. While they did not generate the excitement seen in the latest tech stocks, they grew consistently and reliably paid dividends. This is what one should expect from Kraft Heinz stock or peers such as General Mills (NYSE:GIS), Conagra (NYSE:CAG), or Kellogg (NYSE:K).
The move away from the packaged foods began to change this dynamic. Kraft and Heinz merged in 2015 amid this new trend. In fairness, they have made some moves to embrace the fresh food market. However, packaged foods remain most of their business. What Friday’s news may tell us is that banding together may not have brought the synergies that they had hoped.
Most investment experts argue that because people always have to eat, equities such as Kraft Heinz stock will always have a market. We are now discovering that while people must eat, they do not have to eat packaged foods with ingredient labels that only PhD-level biochemists can understand.
And while people always have to eat, it’s clear the big food makers are no longer driving consumer tastes. Forbes contributor Brittain Ladd recently covered new technology developed by Tel Aviv startup Tastewise that’s using a big data platform to identify the impact of social media more clearly on the influence of food trends.
Low but Pricey KHC Stock Multiple
Hence, perceptions of a safe, food-industry investment have made a permanent change. For this reason, I would caution contrarians not to jump into this stock. Rarely do I call a stock with a forward price-to-earnings (PE) ratio of 13x expensive. However, with falling profits in 2018 and dim prospects for growth this year, this does not look cheap.
Moreover, with these results, we have a troubled balance sheet that has become more compromised. Thanks to the recent drop in the Kraft Heinz stock price, we have a $43 billion company holding about $30.9 billion in long-term debt. Also, even after the $15.4 billion in write-downs, the company still holds $36.24 billion in goodwill. Intangible assets still stand at almost $49.75 billion. Seeing this, the write-downs may have only just begun.
Bottom Line on Kraft Heinz Stock
The latest quarterly report for KHC stock not only outlines the pain at Kraft Heinz, but it also shows us we have to rethink perceptions on food industry stocks in general.
The floor fell out of these shares following $15.4 billion in write-downs and a dividend cut. Years ago, consumers discovered the fact that the need to eat does not necessarily have to depend on the types of packaged foods produced by Kraft Heinz. While that has hurt KHC stock for years, perhaps no single event outlined the pain more profoundly than the latest quarterly report.
Despite this bad news, I do not predict the total collapse of the industry. KHC can still find markets for its products. However, from an investing perspective, I think the pain from this quarterly report will linger for a long time to come. Investors who want an equity that brings both stability and reliable dividends should no longer look to Kraft Heinz stock — or the packaged food industry as a whole.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.