Summary
Kraft Heinz reported weak Q3 results as margins materially contracted, pressuring the bottom line even as the company grew revenue.
Pricing was surprisingly weak, and Kraft may face higher SG&A expenses as it seeks to rebuild brand equity.
Given its low share price, accretive M&A will be difficult.
Until KHC can show signs of margin improvement, shares are likely to remain under pressure, though its dividend will provide some support.
2018 has been a tough year for many consumer product and food & beverage companies as they battle rising input prices, volatile foreign exchange rates, and a fiercely competitive environment. These challenges have plagued Kraft Heinz (KHC) whose stock has fallen by more than 25% this year going into Thursday’s close. Then on Thursday night, KHC reported weak results, pulling shares another 6% lower. Originally seen as a superior operator, thanks to 3G’s cost cutting operational mindset, the company is clearly not immune to broader challenges, and we are now left wondering if costs were cut too deeply. While shares are beginning to look like they offer value, investors should be wary of getting long KHC.
In their third quarter, Kraft Heinz reported deeply disappointing results with non-GAAP EPS of $0.78, $0.03 short of estimates even as revenue bested estimates by 1%. EPS was down 6% year on year despite a lower tax rate. Overall, the picture on the top line wasn’t too bad. Revenue was up 1.6% year on year despite a 1.6% currency headwind. Organic sales growth was 2.6% with volumes up a solid 3.5% while prices were down a disappointing 0.9%. Given rising input prices, most notably in commodities and logistics, the inability to raise prices was particularly troubling and leaves me worried that years of low marketing spending has resulted in diminished brand value and weak pricing power.
