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With its Q4 Mess Now History, Betting on Kraft Heinz Makes Sense

Although the current market environment leans heavily toward technology and digitalization, food-related companies should get their fair share of love. After all, no matter how advanced we become as a society, we’ll never outgrow the need for sustenance. Unfortunately, this big picture viewpoint hasn’t done any favors for Kraft Heinz (NASDAQ:KHC) stock, with shares tumbling following the food giant’s fourth-quarter earnings report on Feb. 13.

The Long Shot Bull Thesis for Kraft Heinz Stock
Source: Casimiro PT / Shutterstock.com

On the surface, the headline numbers weren’t terrible. Prior to Q4, the consensus target for covering analysts pegged earnings per share at 68 cents. Instead, KHC delivered a positive surprise of EPS of 72 cents. What wasn’t so great was revenue, which came in at $6.54 billion. Wall Street anticipated a top-line sales haul of $6.61 billion.

In comparison, that’s a small miss. What investors couldn’t ignore, though, was the magnitude of decline against the year-ago quarter, with sales slipping 5.1%. Thus, analysts lost confidence in the organization’s recovery effort and punished Kraft Heinz stock accordingly. Following the earnings report, shares tanked 7.6%.

If that weren’t enough, management knew ahead of time that investors were seeking detailed guidance for 2020. Yet executives only spoke vaguely about their turnaround strategies during the earnings’ conference call. Likely, that more than anything contributed to most of the volatility in Kraft Heinz stock.

As well, the company disclosed impairment charges of $666 million. This included a write down of Kraft Heinz’s Maxwell House trademark to the tune of $213 million. Last year, KHC placed the coffee brand up for sale but found a largely unenthusiastic response. Also, in 2019, the company wrote down its flagship brands Kraft and Oscar Mayer.

The week ended with the news that global ratings agency Fitch cut Kraft Heinz’s debt rating to “junk,” with the comment that the firm estimates KHC “may need to divest up to 20% of its projected 2020 EBITDA to support debt reduction.”

Is this ship salvageable?

The Speculative Case for Kraft Heinz Stock

Between early 2017 to early spring 2019, Kraft Heinz stock fell into a severe bearish trend channel. But once shares stopped their hemorrhaging, they haven’t recovered. Instead, they’ve gone sideways, punctuated with the occasional and scary dip.

Technically, KHC is reflecting that analysts aren’t giving the food giant much credibility. If you’re observing from the sidelines, it’s hard to disagree with the critics. Moreover, if you’re risk averse, Kraft Heinz stock is not the most confidence-inspiring name. Frankly, there are many other dividend-bearing and stable stocks to consider instead.

To be sure, Fitch questioned the wisdom of KHC maintaining the dividend. Management fired back with the statement, “We believe it’s important to Kraft Heinz shareholders to maintain our dividend during this time of transformation.”

A major problem that has plagued Kraft Heinz is shifting consumer behaviors. In many grocery categories such as sliced cheese or cold cuts, most consumers prefer private labels or store brands. That’s not surprising because of the millennials coming of age.

According to consumer surveys, millennials have “no real preference” between private-label and national brands. With brand out of the picture, one of the biggest considerations is price. This dynamic reflects negatively on total revenues, as we just saw for Q4.

Further, young Americans love dining out. Logically, this may extend to their coffee-buying habits, which hurts run-of-the-mill coffee makers like Kraft Heinz. Not to pour salt on open wounds but millennials also love gourmet coffee. While this term’s definition may vary, I think we can all agree: Maxwell House is not gourmet coffee.

However, demographics may eventually help Kraft Heinz stock. I’d estimate that most millennials today are in their prime family-bearing age. Due to the incredible — and controversial — prominence of cradle-to-grave advertising, it’s possible that millennial parents could start feeding their kids the good stuff. That’s either because they want to, or their kids demand it.

And this demographic shift may also incentive increased spending on cheaper coffee (i.e., Maxwell House).

Not an Easy Buy

While demographics are very powerful economic catalysts, I understand the lingering skepticism toward Kraft Heinz stock. The underlying company has had ample opportunities to turn itself around and has failed each time. Plus, KHC isn’t walking on stable ground, particularly with its high debt load.

However, I can’t help but look at shares from a glass-half-full perspective. As I mentioned up top, this is a food company and this industry doesn’t go out of style. And while KHC declared some write-downs in Q4, it wasn’t anywhere close to the scope of what happened last year.

Finally, Kraft Heinz is keeping its dividend as is. Heading into the report, analysts expected a sharp cut in the payout. In my estimation, you’re left with a speculative name with a believable upside narrative. Better yet, you’ll receive some compensation just for gambling.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/02/with-its-q4-mess-now-history-betting-on-kraft-heinz-makes-sense/.

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