As a conservative-minded, value and fundamental-driven investor, my natural tendency is to shy away from stocks that market experts and popular market media analysts tend to talk to the most about. That means that my investments rarely look very sexy – but I’m far more interested in being able to keep my money working for me in any market condition than I am in “chasing the herd.” That’s one of the biggest reasons that throughout the course of the last few years I’ve found the Consumer Staples sector, and specifically the Food Products industry a good place to find useful investing opportunities.
Consumer Staples are products and goods that you and I need everyday – food, household goods, and the things that we aren’t going to stop buying even when economic conditions prompt us to reign in personal spending budgets and tighten our belts.
In 2018 and 2019, international trade concerns increased uncertainty in the marketplace, which made this industry a smart place to incorporate into a diversified investment portfolio. 2020 reaffirmed the industry’s usefulness as the pandemic prompted a massive, albeit unexpected consumer shift back towards value-based packaged foods. 2022 has added new elements of uncertainty with inflation and rising interest rates, to name just a couple. Those are having a directly impact on Food Products, where prices have been rising at grocery stores across the country, putting an even heavier emphasis on value when it comes to stocking your pantry.
Economic and industry analysts all predicted that the consumer trends I just described would show “stickiness” in 2021, but begin to fade as economic recovery continues into 2022 and 2023. The extended effect of the COVD-19 pandemic, along with the reality of rising interest rates could continue to be a tailwind for the Food Products industry, even as consumer prices increase. A number of the companies in this industry have shown improving fundamental profiles throughout the last two years, including material improvements in cash flows, debt reduction, and overall balance sheet strength. Altogether, I believe that means that Consumer Staples will still have its place as a smart place to keep in mind throughout the rest of the year.
You still have to be careful, though; it’s pretty easy to gravitate to well-known, established names like GIS, CPB, and KR, to name just a few, but just because a company has a great name and brand, it doesn’t mean the stock is a good opportunity right now. It is still important to pay attention to a company’s underlying business – in fact, I would argue that it may be more important than ever, because even with strong relative price performance since March 2020, a number of Food Products stocks continue to reflect very attractive valuation levels.
Kraft-Heinz Co. (KHC) is an example of what I mean. Look in your pantry or fridge, and you’ll probably find a lot of this company’s products on your shelves. In terms of recognizability, there aren’t too many food brands that can claim the brand recognition this company has. Heinz condiments including ketchup, mustard, and mayonnaise have been a mainstay of my fridge for years, and Kraft brands like Oscar Meyer are regulars as well. Despite that easy, name-brand recognition, one of the big struggles a lot of traditional names in the Food Products business have been fighting is the trend away from pre-packaged products and into healthier, organic options. While some, like CPB and GIS, seem to finding ways to stay relevant, KHC has struggled. They’re in the midst of a multiyear, long-term transformation strategy, and the pandemic prompted a stock-your-pantry mindset that gave a lot of companies in this industry, including KHC an opportunity to recapture lost customers and gain new ones. The question that remains, however is whether those positives have translated as expected to the company’s bottom line? Let’s dive in to the numbers so you can decide if this is a company that is worth putting to work for you.
Fundamental and Value Profile
The Kraft Heinz Company is a food and beverage company. The Company is engaged in the manufacturing and marketing of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products. The Company’s segments include the United States, Canada and Europe. The Company’s remaining businesses are combined as Rest of World. The Rest of World consists of Latin America and Asia, Middle East and Africa (AMEA). The Company provides products for various occasions whether at home, in restaurants or on the go. The Company’s brands include Heinz, Kraft, Oscar Mayer, Philadelphia, Planters, Velveeta, Lunchables, Maxwell House, Capri Sun, and Ore-Ida. The Company’s products are sold through its own sales organizations and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, drug stores, value stores, bakeries and pharmacies. KHC’s market cap is about $45.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -16.67%, while sales dropped by -5.46%. In the last quarter, earnings dropped by -24.05% while sales were -9.9% lower. Contrasting with the negative earnings pattern is KHC’s margin profile, which is a sign of strength; Net Income as a percentage of Revenues was 4.77% over the last twelve months, and strengthened in the last quarter to 12.84%.
Free Cash Flow: KHC’s free cash flow was more than $4.1 billion (a sizable improvement from $560 million in mid-2019) over the past twelve months and translates to a useful Free Cash Flow Yield of 8.5%. It is worth noting that this number declined from almost $6.2 billion in the last quarter of 2020, and $4.4 billion in the quarter prior. That more recent, downward sloping trend in Free Cash Flow is a confirmation of the weakness being shown by the earnings per share pattern.
Dividend Yield: KHC’s dividend is $1.60 per share, and translate to an above-average yield of 4.32% at its current price.
Debt to Equity: KHC has a debt/equity ratio of .42. This is a low number that I think is a bit misleading given a high proportional level of debt versus cash and liquid assets. Their balance sheet shows $2.9 billion in cash and liquid assets (down from $3.4 billion in the quarter prior) against almost $21 billion in long-term debt. While debt is below the $31 billion mark it saw in mid-2020, cash has also declined from about $5.4 billion at the beginning of 2020.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target a little below $49 per share. That means the stock is trading at a big discount, with about 32% upside from the stock’s current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart displays the stock’s movement over the last year. The diagonal red line traces the stock’s upward trend from a December 2021 low at around $33 to its high point in May at about $45 per share. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has picked up a lot of bearish momentum from that May high, dropping sharply to about $38 about a week ago, and then dropping again this week to about $36. Current support should lie at around $35.50 based on pivot activity at multiple point in late 20201 as well as in March of this year; however a drop below that could see the stock test its 52-week low at around $33. Immediate resistance is at the 61.8% retracement line, which is sitting at around $37.50. A push above that mark should find next resistance at around $40 where the 61.8% retracement line sits.
Near-term Keys: KHC has been picking up bearish momentum for the past couple of weeks, which makes any kind of short-term, bullish trade very aggressive; however you could use a push above $37.50 as a signal to consider buying the stock or working with call options, using $40 as a practical, bullish profit target. A drop below $35.50 could be a signal to think about shorting the stock or buying put options, with the stock’s 52-week low at around $33 offering a practical bearish profit target. The good news about the stock’s current momentum is that it has also helped improve the stock’s value proposition to useful levels that I think make KHC worth paying attention to; however the current pace of that bearish momentum also suggests that it’s probably smart to wait for additional signs of price stabilization before you seriously consider making a long-term investment in this stock.