Kraft Heinz Earnings: Unwavering Brand Investments Should Serve Up Gains in Time

Key Morningstar Metrics for The Kraft Heinz

• Fair Value Estimate: $51
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of The Kraft Heinz’s Earnings

Kraft Heinz’s second-quarter organic sales sank 2%, while adjusted operating margin plunged 120 basis points to 20.1%. However, the firm held the line on full-year expectations for a 1.5% to 3.5% decline in organic sales against $2.51-$2.67 in adjusted EPS.

Why it matters: Even as value-seeking consumers tighten their purse strings and an appetite for healthier fare impedes center-store categories, we think Kraft Heinz is adeptly focused on investing in its brands and capabilities to support the business over the long term.

• We forecast it will direct 6% of sales to research, development, and marketing annually through fiscal 2034. To fuel this, management is prudently focused on driving efficiencies, in our view, with $1.7 billion of cost savings realized to date out of the $2.5 billion target by fiscal 2027.
• The fruits of these efforts can be seen in the sequential improvement in four of its languishing brands--Capri Sun, Lunchables, Kraft Mayo, and Kraft Mac and Cheese--which all touted dollar sales gains relative to the first quarter on enhanced flavors, packaging, and communication.

The bottom line: We don’t plan a change to our $51 fair value estimate for narrow-moat Kraft Heinz, beyond time value.

• Shares trade about 40% below our intrinsic valuation, after barely budging on the news. We suspect the market’s concerns center around the potential for a lasting volume contraction on persistent inflation pressures, waning consumer spending, and intensifying competition.

Between the lines: While speculation continues to circle surrounding Kraft Heinz’s portfolio restructuring intentions, we don’t surmise that a split of the business would guarantee a value unlock, given the potential for added costs.

• A potential split could result in Kraft Heinz’s sauces, condiments, meals, and snacking brands ($8.5 billion in annual sales) garnering a high-teens EBITDA multiple versus a low-teens valuation for its commoditized coffee, meats, and cheese fare.