Summary
- Kraft Heinz appeared to stabilise its operations in the third quarter, but the final quarter of 2019 was very soft, casting doubt on the initial thesis.
- The company sees continued declines in organic sales, yet is cutting absolute debt levels amidst retained earnings and a lower dividend, although relative leverage ratios remain flat.
- I believe that expectations remain very low, as the challenge is formidable as well.
- Management does not yet have credibility on its side, but the low expectations and low valuations offer sufficient long-term appeal here.
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Kraft Heinz (KHC) continues to be on my investment radar. When the company reported third quarter results in November, I concluded that stability might be arriving.
The company was showing signs of stability with EBITDA declines much less pronounced, comforting, of course, given the high net debt load. The low expectations, solid earnings, and potential made shares compelling enough at levels around $30 in my eyes.
The Latest Performance
Kraft Heinz ended 2019 on a soft note, marking a truly disappointing year. Reported sales for the fourth quarter were down 5.1% to $6.54 billion. Declines were in part driven by currency headwinds (60 basis points) but mostly fell due to a 2.3% decline from divestments and a 2.2% decline in organic sales. With pricing up 2%, the organic growth numbers reveal a very painful 4.2% fall in volumes. This actually marks quite a deterioration from the annual numbers.
Adjusted EBITDA for the final quarter fell 6.6% to $1.56 billion, as the full-year metric fell nearly 14% to $6.0 billion, yet unfortunately, real stabilisation has not yet been achieved. The company ended 2019 with a net debt load of $27.0 billion, a full $3.0 billion improvement from last year. With net debt down 10% year over year, it is easy to see that while actual leverage is down, relative leverage ratios remain stable or, in fact, are up a little bit to 4.5 times EBITDA.
In terms of the earnings numbers, Kraft Heinz reported adjusted earnings of $0.72 per share, down 12 cents from last year, as full-year adjusted earnings fell from $3.51 per share to $2.85 per share. In general, these soft numbers were responsible for shares falling back nearly 10% to $27 and change, at roughly 10 times adjusted earnings. Reported GAAP earnings came in quite a bit lower (in part due to amortisation charges and some cash base adjustments and charges as well).
Hence, this was not a very good quarter, making the outlook ever more important. After the company has been cutting prices to halt volume declines, Kraft Heinz is now actually raising prices in line with inflation, having a direct impact on the volume trends of the company, weighing on sales. Unfortunately, the company did not provide an outlook to investors, leaving somewhat in the blind.
