Inflationary Headwinds Hamper Kraft Heinz Results

We don’t expect to alter our $66 fair value estimate for narrow-moat

Like peers, Kraft Heinz is wrestling with inflationary headwinds in relation to higher inputs, including resin, and freight and logistics. While we don’t expect these challenges to abate in the near term, management reiterated its intent to increase spending to enhance its capabilities, an incremental $300 million this year. We view this as a prudent endeavor in order to withstand the pressures of the intense competitive landscape, a portion of which is likely to be funded by the firm’s stringent eye on driving efficiencies. We forecast Kraft Heinz will ultimately allocate 2%-3% of sales annually to research and development and marketing, versus the low single digits directed to these areas over the past few years and the mid- to high-single-digit levels at peers. Despite the near-term profit hit, we think effective spending could also enhance the stickiness of Kraft Heinz's retailer relationships and subsequently reinforce an aspect of the company's intangible asset moat source.

Following the high-single-digit appreciation in the shares following the release, we now view Kraft Heinz as fairly valued. For investors seeking exposure to the packaged food arena, we’d suggest wide-moat General Mills, which trades at a 20% discount to our valuation and boasts a 4% dividend yield, as a more attractive option.

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