Kraft Heinz: A Boring, Defensive Inventory (NASDAQ:KHC)

Kraft Heinz (NASDAQ:KHC) is as thrilling as attempting to get the final drop of ketchup out of the bottle. That won’t be a nasty factor on this market.

Company Profile

KHC is a maker of meals and beverage merchandise, together with condiments, cheese and different dairy merchandise, espresso, meats, sauces, juices, and different grocery merchandise. It sells its manufacturers at grocery shops, conveniences shops, warehouse shops, drug shops, mass retailers, in addition to to the foodservice business (equivalent to locations like eating places, bakeries, and sporting venues.)

The firm owns six manufacturers that generate $1 billion or extra in income. They embrace Heinz, Kraft, Philadelphia Cream Cheese, Oscar Mayer, Lunchables, and Velveeta. It additionally owns different manufacturers equivalent to Jell-O, Maxwell House, Claussen, Kool-Aid, Capri Sun, Ore-Ida, and Grey Poupon, amongst others.

The firm separates its choices into 7 platforms: Taste Elevation, Fast Fresh Meals, Easy Meals Made Better, Real Food Snacking, Flavorful Hydration, Easy Indulgent Desserts, and Other. Condiments and sauces is its greatest product class, representing over 30% of gross sales, whereas cheese and diary accounts for round 15% of its gross sales.

Opportunities and Risks

Product innovation and model extension is without doubt one of the greatest alternatives for a meals firm like KHC. The meals large has some iconic manufacturers that it could possibly leverage to introduce new variations of merchandise, in addition to extra handy supply. Given the hectic tempo of at present’s life-style, KHC has been significantly centered on the areas On-the-Go and Quick with Quality. In the On-the-Go class the corporate’s Lunchables model has been rising strongly, and its launched different gadgets that may be taken from dwelling to work or college, equivalent to single-serve cups of mac and cheese.

In addition, the corporate can be introducing a fast crisp expertise, in addition to sooner dwelling bake merchandise. Speaking on the CAGNY convention in February, Executive VP Carlos Abrams-Rivera stated:

“Now we know consumers are looking for high-quality food that is convenient to prepare. So here we’re focusing on 2 areas. First, what we call crisp. Now how many of you have put something in the microwave, then you pull it out and think it’s a hot mess? So we actually have solved that pain point, and we will be demoing this during lunch time. Now crisp is not a one-off product with an ownable, patent technology that would allow us to expand into many categories.

“And then there’s Home Bake. Think about all the dishes cooking together in the same oven for 30 minutes with just the push of a button. All of them, each of those dishes, will come out together and look exactly and taste just like homemade. That’s the magic that we have with Home Bake. And with Home Bake, we are solving another pain point for consumers. Families can choose from their favorite main, side or veggie dishes. We are using an ownable technology platform that delivers its new to the world taste and convenience.”

KHC can be pushing into extra wellness meals from rising manufacturers equivalent to Primal Kitchen and thru a three way partnership with NotCo. While individuals need fast meals, there’s additionally a pattern in the direction of more healthy meals in addition to extra plant-based choices. These are traits that KHC is trying to capitalize on, and it is grown the Primal Kitchen model over twofold because it acquired it on the finish of 2018.

KHC can be actually trying to drive its Mexican meals portfolio as properly by way of its Delimex model. At CAGNEY, Abrams-Rivera stated:

“In our Mexican strategy, we will offer options for consumers from end to end across sauces, snacks, meals. For Delimex, in particular, we are collaborating with suppliers to facility innovation, ideation and development. This strategy is bringing commercialization that previously had taken 3 years down to 6 months. And today at lunch, you have a chance to taste our delicious Delimex Taquitos with improved quality and nearly double the filling. Our products and our marketing all inspired by what you should see in the streets of Mexico.”

The foodservice business is one other principal focuses for KHC, and the corporate thinks it could possibly develop gross sales at a 7% CAGR on this channel. The firm stated it has a giant benefit on this area versus friends as a result of it has a 50-50 break up between entrance of the home and again of the home, whereas friends are typically solely at 25% entrance of the home. This offers its manufacturers extra recognition.

Product innovation, elevated penetration, and new channels would be the greatest drivers within the foodservice channel going ahead. Surprisingly, the corporate stated it was solely in half of the highest 50 QSRs within the U.S., usually occasions simply having one SKU. This is an space it is going to assault. KHC may even look in the direction of innovation to drive extra foodservice enterprise, particularly inside sauces. The firm is operating a program name Heinz Sauce Drop the place it is going to drop new sauces at a distinguished restaurant associate, much like how NIKE (NKE) does shoe drops. It’s additionally trying to get into new channels equivalent to colleges.

Emerging markets is one other space of development, each in foodservice and at retail areas. Beside its iconic international manufacturers, the corporate additionally has regional manufacturers, equivalent to Masters in China and Hemmer in Brazil. Speaking about KHC’s worldwide alternative on the CAGNBY convention, Zone President Rafael Oliveira stated:

“We are rising very quickly in rising markets, however nonetheless solely represents lower than 10% of our international gross sales. We have an enormous alternative. Let’s take our key development platform, Taste Elevation, for instance. There’s $60 billion market up for grabs. And the CAGR has been rising at a charge of 6% yearly. We’ve been rising twice that quick and nonetheless solely maintain 5% share of Taste Elevation market in rising markets versus 13% in developed markets. It’s apparent. There’s a lot extra alternative to go after.”

In the near term, pricing has been the big revenue driver, as the company saw a 15.2% increase in pricing in Q4, which offset a -4.8% decline in sales volumes. Pricing will help lift 2023 organic sales above its 2-3% long-term target.

Turning to risk, while CPG companies are recession resistant, they are not completely immune from a weakening macro environment. Consumers will trade down to private label brands during periods of economic weakness.

In addition, the perception regarding private label brands has also been shifting, as in-house brands have become better quality and are cheaper than national brands. While KHC is in some categories that are more defensible, it is still something it is fighting, and tighter consumer budgets doesn’t help.

KHC also have some categories that struggled, such Powdered Beverages and Frozen Snacks and Appetizers. Both these categories have lost market share, and both have been supply constraint as well.

Valuation

KHC stock currently trades around 10.8x the 2023 consensus EBITDA of $6.12 billion and 11.4x the 2024 consensus of $6.35 billion.

It trades at a forward PE of 13.8x the FY24 consensus of $2.73.

Its projected to growth revenue by 2% each of the next two years.

At the CAGNY conference, the company reaffirmed its long-term targets for adjusted EPS growth of 6-8%, adjusted EBITDA growth of 4-6%, and sales growth of 2-3%.

The company trades at one of the lowest multiple among food product peers.

Conclusion

In a nutshell, KHC is a slow growth defensive CPG company. Given its size, nothing is going to change that. And the stock hasn’t been a particularly strong performer over the past five or ten years.

That said, in the current environment, that’s not necessary a bad thing. The company will grow revenue more than normal due to price hikes, and it does have an over 4% yield. However, with a higher risk free rates, CPG companies should theoretically trade at lower multiples.

If you’re looking for safety, it’s an option, but so are money markets paying ~4.5% as well. I view KHC stock as a “Hold.”