Many stocks have come under pressure this year as inflation, rising interest rates and other macroeconomic headwinds have pushed investors toward safer assets. Nasdaq Composite entered a bear market this March, and S&P500 The index followed him in June in the same cave.
With the prospect of an even sharper decline in the second half of the year, many investors may be reluctant to buy more stocks. Additionally, the continued rotation from growth to value stocks has also pushed the valuations of many blue chip giants to unattractive levels.
Image source: Getty Images.
However, inflation also makes sitting on cash a bad idea. So instead of shying away from all stocks, investors should focus on undervalued bear markets that are still trading at low valuations. One stock that fits this profile is the packaged food giant. Kraft Henzo (KHC -2.98%), which has been struggling to get its business back on track in recent years.
What happened to Kraft Heinz?
Kraft Heinz was formed in 2015 from the merger of Kraft and Heinz. As a young company, it initially focused heavily on cutting costs rather than acquiring high-growth brands or investing in new marketing campaigns.
This cost-conscious strategy swayed consumers towards healthier, local and private label in the supermarket aisles. It lowered its prices to stay competitive, but this strategy reduced its gross margin without notably increasing its organic sales.
In February 2019, Kraft surprised investors with a $15 billion writedown on its top brands. Disclosure of an SEC Investigation Regarding a Dividend Deduction and Its Accounting Practices. A few months later, CEO Bernardo Hees resigned, handing over the reins to former chief marketing officer Miguel Patricio. Anheuser-Busch InBev,
How did Patricio solve Kraft’s biggest problems?
Shares of Kraft Heinz were trading at $31 per share on Patricio’s first day, well below their all-time high of $96.65 in February 2017. But as of this writing, they are trading at around $39 per share and are up about 8% this year.
Under Patricio’s leadership, Kraft launched new marketing initiatives for its classic brands. It also sold off its weaker brands — which make up a large part of its cheese portfolio (including Polly O’s overseas business and Cheese Whiz) and its nut business (including Planter) — with growing brands like Brazilian spice maker Hemmer and much of the stake. upon acquisition. At Just Spices, a German spice and condiment manufacturer. This streamlining of the product portfolio, which still includes dozens of other brands (including eight $1 billion brands), gradually stabilized organic sales growth.
The pandemic provided a tailwind for Kraft for much of 2020 as shoppers stocked up on packaged groceries. This unexpected growth momentum allowed Kraft to accelerate its turnaround efforts to reduce its long-term debt from $28.2 billion in 2019 to $21.1 billion in 2021.
Finally, in late 2020, Kraft launched an ambitious new long-term strategy that aims to reduce its costs by $2 billion over the next five years to deliver 4% to 6% adjusted earnings growth annually. That rosy outlook convinced many investors that Kraft-Heinz stock had finally bottomed out.
It must overcome its short-term challenges
Kraft’s top-line growth slowed and its gross margin declined in 2021 as the company weathered the pandemic and faced inflationary constraints, but its cost-cutting efforts continued to boost its operating margin and adjusted earnings per share. .
|
duration |
Fiscal year 2020 |
Fiscal year 2021 |
|---|---|---|
|
Organic sales growth (YOY) |
6.5% |
1.8% |
|
overall profit |
35% |
33.3% |
|
operating margin |
8.1% |
13.3% |
|
Adjusted EPS Growth (YOY) |
1.1% |
1.7% |
Data source: Kraft Heinz. YOY = year after year.
In Kraft’s first-quarter earnings report in April, the company forecast that its full-year organic revenue would grow by a “mid-single-digit” percentage, but its Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) would rise. ) Will happen. Still down 6% to 9% as it struggles with higher costs.
like your industry peer General Mills (GIS -1.87%), Kraft relieves some of this pressure with price increases. Analysts expect Kraft’s adjusted earnings per share to fall 8% this year, but expect a 3% rebound in 2023 on the back of those headwinds.
Patricio said during his most recent conference call that Kraft is “effectively managing our inflation, improving our supply constraints while continuing to deliver incremental efficiencies.” Chief Financial Officer André Maciel also predicted that inflation will eventually stagnate and that Kraft’s gross margin “will recover as costs stabilize and prices are realised.”
Low valuations and high dividends
Kraft’s growth rate is likely to remain weak this year, but it’s the kind of slow-moving defensive stocks that fare well in brutal bear markets.
The stock trades at 14 times forward earnings and offers an attractive expected dividend yield of 4.1%. In comparison, General Mills trades at 19 times forward earnings and pays a lower expected yield of 2.9%.
Kraft’s low valuation and high yield should limit its downside in this volatile market and it should remain a solid investment once a recession hits.
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