Morningstar

Kraft Heinz’s Top Line Soars on Heels of Renewed Commitment to Brand Spending

Firm had solid fourth-quarter marks of 10.4% organic sales growth, 60 basis points of degradation in the adjusted gross margin to 32.2%, and a 20-basis-point shortfall in its adjusted operating margin to 20.3%.

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Securities In This Article
The Kraft Heinz Co
(KHC)

We don’t expect any material change to our $52 fair value estimate for no-moat Kraft Heinz KHC after digesting solid fourth-quarter marks of 10.4% organic sales growth, 60 basis points of degradation in the adjusted gross margin to 32.2%, and a 20-basis-point shortfall in its adjusted operating margin to 20.3%. While the market has taken a more somber view (with shares holding flat), we think Kraft Heinz should be on investors’ shopping list, trading at a 25% discount to our intrinsic valuation while offering a 4% dividend yield.

We think recent performance (which came in the face of pronounced inflationary pressure and supply chain disruptions) is a byproduct of the firm’s astute focus since CEO Miguel Patricio took the helm in mid-2019 to recenter the business on surgically extracting costs and prioritizing investment in its brands (through consumer-valued innovation and marketing) and capabilities (through category management and e-commerce). In our view, the prudence in this path is evident as sales sit 6% above fourth-quarter 2019′s level.

We recognize sales were jolted by a more than 15% contribution from higher prices (offset by a nearly 5% downdraft in volumes, modest relative to level of price hikes), but price hasn’t been the only lever Kraft Heinz is flexing to offset input cost increases (up 20% in fiscal 2022, with a high-single-digit surge slated for fiscal 2023). In this vein, the firm also unearthed $450 million in savings in fiscal 2022 (outpacing its $400 million annual target). And while this pursuit could be cause for concern given that Kraft Heinz had been plagued by an outsize focus on siphoning off costs without a commensurate increase in spending to support the long-term health of the business under its prior regime, current management has been resolute that cost savings will fund reinvestment. This aligns with our forecast calling for Kraft Heinz to direct 6% of sales ($1.7 billion) annually in research, development, and marketing.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Erin Lash, CFA

Sector Director
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Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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