Is Kraft Heinz Q4 Earnings a Buy Signal?

The Kraft Heinz Company (KHC) recently disclosed its fiscal 2023 fourth-quarter earnings, revealing a sharper-than-expected decline in quarterly sales. This signals sustained subdued demand for its sauces and meat cold cuts following past price increases, prompting the company to predict slower annual core sales growth.

Over the past year, KHC has experienced diminishing sales, primarily due to a volume downturn in its North American meat business. Concurrently, economically constrained consumers favored more affordable private-label brands, contributing to the company's challenges, as CEO Carlos Abrams-Rivera acknowledged.

For fiscal 2024, the company anticipates organic net sales to either remain flat or grow by up to 2%, contrasting with the 3.4% organic net sales growth recorded in 2023. Moreover, it expects adjusted gross profit margin to expand by 25 to 75 basis points, attributing this to heightened marketing and promotional efforts, compared to the 240-basis-point increase observed in 2023.

Simultaneously, KHC is exploring avenues for expanding its growth prospects. On November 29, 2023, KHC introduced KRAFT® NotMac&Cheese, the first-ever plant-based iteration of KRAFT Mac & Cheese in the United States. The launch underscores KHC's commitment to broadening its plant-based offerings across diverse brands and categories.

Moreover, the initiative would supplement KHC's existing plant-based products, including KRAFT NotCheese Slices and NotMayo. Looking forward, the company aims to extend its presence across additional categories and embark on international expansion initiatives in 2024.

Shares of KHC have gained 2.8% over the past three months. However, it has plunged 16% over the past nine months to close the last trading session at $34.16.

Here are the financial aspects of KHC that could influence its price performance in the near term:

Mixed Financials

During the fiscal 2023 fourth quarter that ended December 30, 2023, KHC’s operating income increased 6% year-over-year to $1.30 billion. Its adjusted gross profit marginally grew from the year-ago value to $2.38 billion.

However, the company’s adjusted net income and adjusted EPS declined 8% and 8.2% from the prior year’s quarter to $964 million and $0.78, respectively.

Mixed Growth Record

Over the past three years, KHC’s revenue increased at a CAGR of 1.8%. Its normalized net income grew at a 3.1% CAGR. However, the company’s total assets and levered free cash flow declined at respective CAGRs of 3% and 11.2% over the same time frame.

Mixed Analyst Estimates

The consensus revenue estimate for the fiscal 2024 first-quarter ending in March 2024 stands at $6.43 billion, signaling a marginal year-over-year decrease. Conversely, the company's EPS is anticipated to see a marginal uptick from the previous year, reaching $0.69.

Looking ahead, analysts anticipate a modest increase in revenue for the fiscal 2024 second quarter (ending in June 2024), with projections reaching $6.76 billion. However, the corresponding EPS for the same period is expected to experience a modest decline of 2.4% from the previous year, settling at $0.77.

Mixed Profitability

The stock’s trailing-12-month EBITDA margin and trailing-12-month net income margin of 23.88% and 11.00% are 109.3% and 131.3% higher than the industry averages of 11.41% and 4.76%, respectively.

However, the company’s trailing-12-month gross profit margin of 33.24% is 1.4% lower than the 33.70% industry average. Moreover, its trailing-12-month asset turnover ratio of 0.30x is 63.5% lower than the 0.83x industry average.

Mixed Valuation

In terms of forward non-GAAP P/E, KHC is trading at 12.19x, 30.9% lower than the industry average of 17.64x. Its forward EV/EBITDA of 10.05x is 10.1% lower than the 11.18x industry average. However, the stock’s forward EV/Sales and forward Price/Sales of 2.37x and 1.66x are 44.3% and 48.4% higher than the industry average of 1.64x and 1.12x, respectively.

POWR Ratings Exhibit Mixed Prospects

KHC’s outlook is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. KHC currently holds a C grade for Growth, indicating its mixed performance in recent years. Similarly, its C grade for Value reflects its ambiguous valuation.

Additionally, the company has a C grade for Quality, aligning with its mixed profitability. KHC is ranked #57 out of 79 stocks in the Food Makers industry. Click here to access KHC’s Momentum, Stability, and Sentiment ratings.

Bottom Line

While the company exhibits potential for long-term growth with its initiatives to venture into plant-based offerings and international markets, considering its recent weak financial performance, differing profitability metrics, and mixed valuation, it might be prudent to await a more favorable entry point in KHC.

How Does The Kraft Heinz Company (KHC) Stack Up Against Its Peers?

While KHC has an overall grade of C, equating to a Neutral rating, you may check out these A (Strong Buy) and B (Buy) rated stocks within the Food Makers industry: US Foods Holding Corp. (USFD), Toyo Suisan Kaisha, Ltd. (TSUKY) and Lifeway Foods, Inc. (LWAY). To explore more Food Makers stocks, click here.

What To Do Next?

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! >

KHC shares were trading at $34.76 per share on Thursday morning, up $0.60 (+1.76%). Year-to-date, KHC has declined -6.00%, versus a 5.20% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

More...