Kraft Heinz Earnings: Even Amid Strains, Sales and Profits Climb on Price Hikes; Shares Attractive

Kraft Heinz KHC adeptly withstood commodity, transportation, and logistics inflation as well as lingering supply chain angst, as evidenced by solid first-quarter marks that sent shares up at a mid-single-digit percentage clip. Organic sales popped 9.4%, while adjusted gross and operating margins expanded 130 and 90 basis points, respectively, to 32.8% and 19.5%. Higher prices at the shelf were once again a major contributor, serving as a nearly 15% benefit to the top line, as volumes retreated 5.3% (still modest relative to the level of price hikes passed through).

But we don’t surmise raising prices is its only path to dispel inflation’s rout (up 20% in fiscal 2022, with a high-single-digit escalation pegged for fiscal 2023). Rather, we think Kraft Heinz’s regime is keenly aware of the value in surgically extracting inefficiencies (now targeting $500 million in savings this year, up from $400 million), which we perceive as judicious. While this pursuit could invoke concern given its past bent was anchored in blindly siphoning off costs, current management has been resolute that investments in consumer-valued innovation and marketing support is a strategic priority, funded through its cost-savings efforts. In this context, management is calling for a double-digit increase in marketing spending this year; this aligns with our forecast for it to expend around 6% of sales, $1.7 billion, annually on research, development, and marketing.

When taken together, management boosted its fiscal 2023 adjusted EPS outlook to $2.83-$2.91 (from $2.67-$2.75 prior), while holding the line on its call for 4%-6% organic sales growth. We’ll move our preprint estimate ($2.74) to the revised range, but with no change to our long-term forecast (2% sales growth and low-20s operating margin), our $52 is unlikely to shift. At a 20% discount to our intrinsic valuation (and with a 4% dividend yield), though, we think investors would be wise to add this no-moat name to their shopping cart.