This time last year, Kraft Heinz (NASDAQ:KHC) reported fourth-quarter results that will live in infamy. It’s not often that a Warren Buffett investment delivers an $11 a share impairment charge in a single quarter, but that’s what happened on Feb. 21, 2019. As a result, Kraft Heinz stock dropped 27% in a single day of trading.
It has been a rocky road for Kraft Heinz shareholders ever since.
On Feb. 13, the company reports its fourth-quarter results, and while they’re not expected to be anything to write home about, compared to last year’s carnage, they will be relatively good.
The question for investors at this point is simple: Where to next?
Before I get to that, let’s get some of the critical numbers out of the way.
Earnings Expectations for Q4
According to Yahoo Finance, Kraft Heinz is expected to announce revenue of $6.6 billion and earnings of 68 cents in the fourth quarter. This would suggest a decline of 4.2% and 19%, respectively, from a year earlier.
Ouch.
However, as I said, there shouldn’t be any surprises like there were last year. Not only did the company take a $15.4 billion impairment charge in Q4 2019, the seventh-largest impairment charge since 2009, it also announced an SEC probe that led to a $25 million accounting correction.
“Quite unusually, the impairment was triggered by short term developments in the second part of 2018, as opposed to a routine impairment evaluation,” wrote research firm Audit Analytics after last year’s debacle.
As long as the words “impairment charge” don’t make their way into the quarterly press release, it should be fine.
Not only that, but the company has managed to deliver positive earnings surprises in the last two quarters — 30% in Q3 2019 and 4% in Q2 2019 — so it’s more than possible that it will do it again on Feb. 13.
Ah, the silver lining.
Where to for Kraft Heinz Stock?
The current target price, according to The Wall Street Journal, is $31.05 with a high of $37 and a low of $23. Based on the average, we’re looking at 7.5% upside over the next 12 months.
That’s not very encouraging if you’re Warren Buffett. The Motley Fool’s Keith Noonan did an excellent job in November, pointing out how much Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) has made to date on its 26.8% stake in the company.
Berkshire paid about $30 a share for its stake. As I write this, it’s trading around $29, so the holding company is down $325 million on the stock price since 2015, but up more than $3.5 billion on the dividends.
As Noonan said, Berkshire’s gains pale in comparison to the performance of the S&P 500 over the same period. It’s for this reason Buffett has admitted that it paid too much for Kraft Heinz.
In January, CEO Miguel Patricio revealed the company’s strategy for extricating itself from the hole it’s dug.
“My role is to simplify this business. Fewer, bigger bets,” Patricio told the Journal. “If you try to innovate in 56 different categories every year, you can’t execute on all of them. We need to be more selective.”
It also needs to meet the needs of consumers hankering for healthier food choices. Kraft Dinner is not on most people’s list of healthful eating.
However, the fact that it hired Campbell Soup (NYSE:CPB) executive Carlos Abrams-Rivera to run its U.S. business does not give me a warm, fuzzy feeling. Campbell’s is not exactly known for being an innovation machine. And while I’m sure Abrams-Rivera is a perfectly good executive, it smacks of “more of the same.”
In November, I pointed out that Kraft Heinz Chairman Alex Behring, one of 3G Capital’s founding partners, approached Patricio about the job early in 2019. The fact that Patricio hired Flavio Torres as Kraft Heinz’s head of global operations — Torres is a former colleague of Patricio’s at Anheuser-Busch InBev (NYSE:BUD) — suggests to me that the 3G cronyism continues despite the talk of innovation and simplification at the company.
The Bottom Line
I’m not sure at what price I would recommend KHC stock. I certainly wouldn’t buy it in the $30s. At least not until the CEO proves that his strategy is more than Business School 101.
That said, I don’t think there’s anything that we’ll see from Kraft Heinz’s quarterly report that will further damage its stock price. I guess we’ll find out soon enough if that’s the case.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
