Kraft Heinz: Even With a Pending C-Suite Switch, Strategic Sea Change Unlikely; Shares Attractive

After nearly five years at the helm, no-moat Kraft Heinz KHC announced CEO Miguel Patricio will step down in January, with Carlos Abrams-Rivera—who joined the firm in 2020 and currently serves as executive vice president and president of North America—poised to take the reins. Patricio will continue to serve as executive chairman to ensure a smooth transition. Abrams-Rivera boasts an extensive career in the consumer packaged goods industry, with time spent at wide-moats Campbell Soup and Mondelez, and strikes us as a sound fit for the role. And because he has been intimately involved in scripting and executing the firm’s strategic playbook (anchored in upping the ante on brand spending and bolstering its category management and e-commerce capabilities), we don’t expect Kraft Heinz will veer off its current course under his watch. Our Standard capital allocation rating remains in place.

Even against macro upheaval, the strides made since Patricio took the helm are quite noteworthy. Kraft Heinz proactively enhanced its financial flexibility, with net debt/EBITDA hovering in the low-3 times range, down from north of 4 times in 2019. We believe this affords the firm the ability to reinvest in its operations and selectively pursue acquisitions while bolstering shareholder returns, embodied by our forecast for mid-single-digit percentage increases in its dividend each year beginning in fiscal 2023, implying a payout ratio of 50%-60%. He has instilled enhanced operational agility in aligning its mix with evolving consumer trends that we think should unlock modest low-single-digit sales growth while holding margins. The success of these efforts is evident in organic sales that are running more than 5% above prepandemic levels.

At around a 35% discount to our $53 fair value estimate (and a nearly 4% dividend yield), we think investors would be wise to stock up on the name.

(Aug. 15, 2023): This note has been updated to correct the discount to our fair value estimate to 35%.