Morningstar

Kraft Heinz: Shares Tick Up on Speculation a Split Is Forthcoming

Efforts to unearth cost savings should support brand spending, resulting in top-line growth.

Consumer Defensive Sector artwork
Securities in This Article
The Kraft Heinz Co
(KHC)

Key Morningstar Metrics for Kraft Heinz

Kraft Heinz KHC traded about 3% higher on July 11, following a report by The Wall Street Journal that the company could separate its operations. Details were scant as to the composition of either business, and the timing is unclear.

Why it matters: Like others in its space, Kraft Heinz has struggled to juice sales as consumers pinch pennies and health and wellness takes center stage (with rising GLP-1 penetration and regulatory pressure).

  • While management may suggest that separation would afford more focus for each unit, we think it would be driven by a desire to unlock a higher multiple.
  • This move would mirror actions over the past 10-15 years from WK Kellogg/Kellanova, Kraft/Mondelez, Conagra/Lamb Weston, Sara Lee, Fortune Brands, and others.

The bottom line: Given that a breakup is far from certain, we’re holding the line on our $51 fair value estimate for narrow-moat Kraft Heinz.

  • We believe the stock is a bargain, as the market seems to expect a lasting volume contraction on the heels of persistent inflation, waning consumer spending, and aggressive competition.
  • In our view, efforts to unearth cost savings (with $1.5 billion achieved thus far out of the $2.5 billion targeted by 2027) should support brand spending, resulting in low-single-digit top-line growth over the long term.

Between the lines: If a split is announced, we think Kraft Heinz could combine its sauces, condiments, meals, and snacking brands (about $8.5 billion in annual sales by our estimate) while spinning off its commoditized fare (coffee, meats, and cheese) and its hydration and desserts business ($17 billion).

  • Based on a sum-of-the-parts analysis, we assume the condiments and snacking piece could garner a high-teens EBITDA multiple (given more robust sales growth and margin prospects), versus a low-teens valuation for the commoditized arm (with lower growth and weaker profits).
  • However, we don’t believe this would result in material value appreciation, given the potential for added costs.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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