Kraft Heinz's Top Line Sours Again in the 2nd Quarter

Since the

As such, we haven’t wavered from our stance that amid an intensely competitive landscape, and with the need to invest behind its brands to bolster top-line performance, the firm’s margin trajectory could be constrained in the longer term. Further, we surmise commodity cost inflation headwinds (which management called out as pronounced within cheese and coffee to the tune of $80 million in the quarter) are also poised to eat into profits. While Kraft Heinz has paid lip service on the need to up investments behind its brands, we have yet to see evidence that it is willing to sacrifice margin improvement to do so. Beyond potentially aiding its top-line prospects, we also believe effective spending behind research and development, or R&D, and marketing could enhance the stickiness of Kraft Heinz's retailer relationships, and subsequently strengthen an aspect of the intangible asset source behind its narrow moat.

With the firm’s first-half results generally aligning with our full-year expectations (for 0.5% reported sales growth and high-20s operating margins), we see little impetus for change to our $70 fair value estimate, but with shares trading at nearly a 25% premium to our valuation, we’d suggest investors refrain from building a position at such lofty levels.

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