Kraft Heinz Sees Solid Q2; Shares Still Offer Upside
We see little in the results to warrant a material change to our $48 fair value estimate for this no-moat company.
Building off its solid start to the year, no-moat Kraft Heinz (KHC) chalked up accelerating sales (up 7.4% on an organic basis, versus 6.2% in the first quarter) and enhanced profits (adjusted operating margins expanded around 200 basis points to 23%) in the second quarter. The bulk of this growth can be attributed to the ancillary impact of the pandemic, which bolstered sales on its home turf 8.5%, three quarters of its consolidated base, as sales through the retail channel (85% of Kraft Heinz’s mix, up 15% in the U.S.) continued to win out at the expense of a pullback in food-service (down 46%)--with similar marks posted in its Canadian and international operations.
Even though the pace of gains will undoubtedly slow over the next several quarters (as consumers work through their pantries and resort to away-from-home food consumption as social distancing mandates are eased), we don’t believe Kraft Heinz has pushed pause on efforts to steady its ship, as management repeatedly stressed the importance of not losing sight of its turnaround agenda. We still expect its strategic playbook to be anchored in pursuing sustainable efficiencies (versus blindly rooting out costs) as it opts to elevate its brand spending (marketing and product innovation) and enhance its capabilities (category management and e-commerce). However, with its long-awaited investor day now in view (to be held virtually on September 15), details on the underpinnings of its path forward were scant.
As such, we see little in the results to warrant a material change to our $48 fair value estimate and will await more concrete details surrounding its medium- and longer-term objectives before altering our long-term outlook (which continues to call for 2%-3% annual organic sales growth and low-20s operating margins). Despite near-term uncertainty, we still think Kraft Heinz possesses the ingredients to buoy its trajectory and view shares as attractive, trading 30% below our assessment of intrinsic value.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.