Morningstar

Kraft Heinz Undervalued Despite Bad News

Kraft Heinz Undervalued Despite Bad News
Securities In This Article
The Kraft Heinz Co
(KHC)

While no-moat Kraft Heinz boasted its second-consecutive period of more than 2% organic sales growth in the last quarter of 2018, this was overshadowed by a rash of unfavorable headlines surrounding profit contraction, an SEC investigation into its procurement accounting, and a reduction in its quarterly dividend. Despite this, we view shares as undervalued today.

In the quarter, adjusted operating margins contracted. We do expect this pressure to persist, but we view the firm's emphasis on ratcheting up spend behind its brands and capabilities favorably. More specifically, research, development, and marketing spending at Kraft Heinz has hovered in the low-single digits of sales the past few years--lagging their peers--but we expect investments will expand this number to a mid-single-digit range annually over our 10-year forecast.

In light of profit headwinds, we intend to edge down our $60 fair value estimate by a mid-single-digit rate, but we still view shares as undervalued given the pronounced pullback the last few months.

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About the Author

Erin Lash, CFA

Sector Director
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Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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