Summary
- At the root of Kraft Heinz misery in the past few years has been a flawed strategy of focusing on mergers followed by cost-cutting.
- New leadership is bringing in new strategy of product innovation, combined with better marketing. Latest quarterly results suggest that Kraft Heinz has necessary financial strength to sustain the turnaround.
- The global economic outlook suggests consumer staples companies may be in favor going forward, providing an extra boost for Kraft Heinz.
I bought Kraft Heinz (NASDAQ:KHC) stock at the end of 2018, the idea being that I should start adding more non-cyclical stocks to the portfolio in preparation for a global economic slowdown. I by no means think the idea is bad, and I will continue to increase the non-cyclical proportion of my investments. But it goes without saying that my timing in regards to the Kraft Heinz investment was by no means ideal. Soon after I bought some shares, there was the dividend cut. The announcement came along with the $15 billion write-down in assets, which sent the stock into a tailspin. The pain continued for the rest of the year, until the third quarter results were released, which seems to signal a stabilization of the situation. It shows an improvement in profitability trends. An early sign of perhaps a turnaround being in its early stages. Or at least, a sign that the new corporate leadership in place has put an end to the continued collapse and managed to stabilize the situation. New refocus on product development is welcome news, which I have been insisting all along, that it will be key to a turnaround. Early signs of a turnaround are welcome and may work to the advantage of this stock as the global economy continues to show signs of slowing down, which should benefit consumer staples companies, like Kraft Heinz.
Declining sales revenue, but improved profitability
Looking at the reported financial results of the third quarter, we see a slight decline in revenues from $6.4 billion in the third quarter of 2018, to $6.1 billion for the latest quarter. This is a troubling trend, which in my view will need to at the very least stabilize before we can have any chance of seeing this stock begin to forge a path towards regaining the value it lost in the past few years. Given that the stock currently trades at just under $33/share while it traded at a peak of just under $97/share at the beginning of 2017, it would have a very long way to go. The only way to sustain a return to such levels in the next decade will be to find ways to grow sales.
The aspect of the latest quarterly report which excited the market, which helped this stock rise by about 30% compared with the low it hit in August of $25/share, was the improvement in profitability. Net income came in at $899 million, compared with $619 million in the corresponding quarter from a year ago. It seems that write-downs are no longer weighing down results as they did in the last few quarters. The cost of products sold also declined in line with revenues, meaning that its profitability prospects are stable. The one major negative trend is the increase in debt servicing costs. Interest payments amounted to $398 million, versus $326 million for the same quarter from a year ago.
