Kraft Heinz's Results Are a Modest Positive

Despite posting a 1.1% retreat in organic sales and 90 basis points of erosion in adjusted operating margins to 20.2% in the third quarter, we view Kraft Heinz’s KHC results as a modest positive compared with the dire performance the business has chalked up over the past several years. Management again attributed the sales shortfall to reduced inventory levels at developed market retailers and unfavorable promotional spend, which drove a 2.1% pullback in volumes and unfavorable mix that was only partially offset by a 1% bump in prices on a consolidated basis. And while higher supply chain costs and input cost inflation continued to eat into profits, we’re encouraged by new CEO Miguel Patricio’s repeated references to the need to root out inefficiencies (as opposed to its past directive centered on deep cost-cutting) and bolster the investments behind its brands.

Although Patricio has yet to formally divulge his strategic roadmap for the business (which is set to occur in early 2020, about six months after taking the helm), we surmise that change is already underway. In this vein, Patricio has been engaging with employees around the world, meeting with the firm’s leading retail partners, and assembling a management bench to ultimately execute on its plan (including the appointment of a chief growth officer and a new chief financial officer).

We see little to warrant altering our $50 fair value estimate or long-term outlook (calling for 2%-3% annual organic sales growth long and operating margins remaining in the low-20s throughout our 10-year explicit forecast). Although shares soared at a low-double-digit clip following the print, we still think the stock offers additional upside over a longer horizon. However, we don’t expect near-term catalysts to materially narrow the gap relative to our assessment of Kraft Heinz’s intrinsic value and suggest investors employ patience with the no-moat name.

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