Consumer packaged foods analysts are having mixed opinions on Kraft Heinz’s recent share value jump with some saying the U.S. ketchup giant’s better-than-expected Q3 2019 earnings mark a turning point for its declining business.
The company’s quarterly net sales ended September 28, 2019 were $6.08bn, an organic 1.1% year-over-year decrease from $6.38bn in Q3 2018, beating expectations for a 1.6% drop. Its Q3 adjusted EBITDA declined roughly by 4.5% year-over-year to $1.47bn on a constant-currency basis versus 16% in the first half of 2019.
“While our third-quarter results remained below our potential, we showed sequential improvement versus the first half, and I believe we are beginning to operate the business better,” recently appointed CEO Miguel Patricio said in a statement.
“We are making good progress in identifying and addressing the root causes of past performance, as well as setting our strategic direction.”
Kraft Heinz has experienced a rough year so far as it wrote down value of its major brands including Kraft and Oscar Mayer this February, followed by a nearly 25% share price drop.
The company’s second-largest investor after Warren Buffett’s Berkshire Hathaway, 3G Capital Partners, later sold 25.1 million of its shares.
However, Patricio has identified several growth areas during the latest period, saying “in ketchup, specifically, we are getting great traction around the world behind our Heinz 150th anniversary.
“Brazil is growing double digits in both retail and foodservice channels, and we are seeing solid growth of 14% in our China soy sauce business.”
But the business is still “far from” where it should be, he noted, saying “our performance remains uneven across categories and geographies. This includes ongoing share and distribution losses within our natural cheese, cold cuts and coffee business in the US, lower-than-anticipated promotional lifts in Canada, ongoing infant nutrition declines in both EMEA and China, as well as increasing supply chain costs in our rest of the world segment”.
Kraft Heinz is aiming to become a more efficient company through nine transformational projects — among which “five projects [are] focused on top line, two projects focused on operational efficiency and two projects focused on organizational effectiveness”, Patricio said, noting the team will also identify categories that can be divested in the future.
“Around our innovation efforts, we are revamping our product development process so we can be faster and more consumer-centric with our new products,” he added.
Kraft Heinz shares jumped more than 13% after announcing its Q3 earnings.
Morningstar director of consumer sector equity research Erin Lash felt encouraged by Patricio’s plans to improve Kraft Heinz’s business efficiency, saying she views the company earnings as “a modest positive”.
“Although Patricio has yet to formally divulge his strategic roadmap for the business, we surmise that change is already underway,” she recently wrote in a note. “We see little to warrant altering our $50 fair value estimate or long-term outlook — calling for 2-3% annual organic sales growth long and operating margins remaining in the low-20s throughout our 10-year explicit forecast.”
Lash added: “Although shares soared at a low-double-digit clip following the print, we still think the stock offers additional upside over a longer horizon.
“However, we don’t expect near-term catalysts to materially narrow the gap relative to our assessment of Kraft Heinz’s intrinsic value and suggest investors employ patience with the no-moat name.”
Hesitant to buy stocks
Other industry analysts are more skeptical about Kraft Heinz’s sudden share price increase, suggesting investors to hold off buying the company’s stocks.
President of Minnesota-based Gradient Investments Michael Binger recently told CNBC’s ‘Trading Nation’ that Patricio has “put some stabilization” into the company, but “when we look at it, we’re not buyers here just yet”.
That is mainly because of Kraft Heinz’s significant year-to-date value drop coupled with its ratings cut, dividend cut and declining profitability.
Binger said: “As it stands right now, we would stay away and we would be inclined to take profits if you did hold it at this point right now, and just wait until next year and see how this thing plays out a little further.”