Kraft Heinz Looking to Recapture Its Recipe for Success

Erin Lash: Kraft Heinz was once viewed as a darling in the packaged-food space, but shares have soured, falling around 30% over the past year, as the firm has failed to sustain prior operating-margin gains. But we believe change is afoot, following the appointment of new CEO Miguel Patricio. From our vantage point, he may possess the recipe to whip up sales and profits for this no-moat operator.

Patricio has been reluctant to formalize his strategic aims for the plagued business as of yet, but we posit that his extensive resume, including time as president of Asia and chief marketing officer for wide-moat Anheuser-Busch InBev, suggests he grasps the importance of consumer-valued brand spend. This would prove a shift for Kraft Heinz, where insufficient spend has impaired its retail relationships and brands over the past several years. Further, we believe new management is keenly attuned to the error in blindly rooting out costs, favoring sustainable efficiencies. And to foster enhanced financial flexibility, we think management will shun acquisition opportunities as it works to steady its ship and lessen its extensive debt load.

Although we don't expect the ship to turn overnight, we think patient investors should serve up a slice of Kraft Heinz's shares, which trade nearly 40% below our assessment of their intrinsic value. Even on more traditional valuation metrics, the shares strike us as attractive at just 10 times forward 2020 earnings per share, a far cry from the mid-20 times where they traded at their peak and below the 16 times average of Kraft Heinz's packaged food peer set.