Kraft Heinz (NASDAQ: KHC) is facing headwinds like all staples companies, but the Q2 results show the turnaround strategy is still working, and the company is gaining momentum. The primary takeaway is that growth is on the table, and margins are widening and will help facilitate growth over the next few years.

With shares trading at nearly the lowest valuation of any consumer staple stock and operational improvements taking hold, the question is when the multiple expansion will begin and it could be soon. The Q2 results were mixed but strong enough for the company to reiterate the guidance.

That alone creates a situation in which results and outlook are not-as-bad-as-expected; if business momentum continues to build, the guidance may be improved again later in the year. 

Kraft Heinz Overcomes Headwinds 

Kraft Heinz had a solid quarter with growth in all regions and operating segments. The company reported $6.72 billion in net revenue for a gain of 2.6% compared to last year.

The growth is slightly below the Marketbeat.com consensus but not significantly so, and the margins came in wider than expected to offset the weakness. On an organic basis, growth topped 4%, driven by an 11% increase in systemwide pricing and a 7% decline in volume. The volume decline is attributed to elasticity which is not good news.

Still, no more significant pricing actions are expected, and volume will build over the next few quarters as growth efforts gain traction. On a regional basis, North American growth markets advanced by 0.8%, core Kraft Heinz grew by 2.6%, and International growth markets by 8.5%. 

The margin news is the best of the report, with gross and operating margins expanding compared to last year. The gross margin expanded by 337 basis points, 180 adjusted, the drive a +100% increase in cash from ops and a nearly 4X increase in net income. Adjusted net income is up 6% compared to last year, outpacing the top-line 2.6%, with adjusted EPS of $.79 growing nearly 13% YOY and outpacing consensus by 400 bps.

The margin strength was good enough for the company to raise its earnings guidance while reiterating the revenue outlook, which calls for 4% to 6% organic growth this year. Adjusted earnings are expected from $2.83 to $2.91 compared to the $2.89 consensus figure; not a catalyst for a significant rally but better than the whisper numbers feared. 

The Kraft Heinz Value Proposition: Deep Value-High Yieid

The primary attraction of Kraft Heinz shares is the deep value and high yield. The stock trades at only 12.5X its earnings outlook, which is about ⅓ of the valuation of the highest-flying staples like McCormick (NYSE: MKC) and half of Hormel (NYSE: HRL).

McCormick trades closer to 33X its earnings while paying less than half the yield of KHC; Hormel trades close to 24X. MKC shares yield less than 2%, Hormel about 2.65%, while Kraft pays more than 4.0%. McCormick isn’t growing faster than Kraft but has a better dividend outlook-McCormick has been growing its distribution while Kraft has been working on a business turnaround.

The ultimate difference is that MKC investors are more likely to experience a price-multiple contraction. Kraft yields more and is on track for a price-multiple expansion that could double the share value over the next few years. 

The Technical Outlook: Kraft Heinz Is Range Bound 

Shares of KHC stock have been range bound the last 2 years and may remain that way until later this year. However, the stock is trading near the bottom of the range and showing support that could increase it over the next few months. The next major hurdle is near $36.50, a move above that could lead the market up to the top of the range near the $40-$42.50 range.