Kraft Heinz: Why I’m buying at these levels (NASDAQ: KHC)

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Consumer staples are a good way to protect against an economic downturn, as households should continue to turn to familiar brands in good times and bad. That’s why I hold undervalued players like Unilever (UL) in a diversified income portfolio.

This brings me to Kraft Heinz (NASDAQ: KHC), which is again trading below $40. In this article, I outline why KHC is once again in the buy range and a worthwhile holding for an income portfolio, so let’s get started.

Why KHC?

Kraft Heinz is the third largest food manufacturer in North America, with iconic brands such as Oscar Mayer, Heinz Ketchup, Velveeta and Kraft Mac & Cheese. The company has a strong presence in both developed and emerging markets, with over 200 brands in its portfolio and sales in 190 countries.

While the company has faced some challenges in recent years, including a failed merger attempt with Unilever in 2017 and an accounting scandal in 2021, it has made progress on its turnaround plan. Kraft Heinz has divested non-core businesses and is focused on growing its core categories.

The company’s results have been mixed in recent quarters, but there are signs that Kraft Heinz is starting to turn the corner. In the last reported quarter, Kraft Heinz reported earnings and revenue above expectations, with organic sales growth of 6.8% year-on-year and a CAGR of 5.3% on a 2-year basis. This was driven by the strong performance of the company’s core business in the United States as well as emerging markets, which increased organic sales by 7% and 10% year-on-year, respectively.

Kraft Heinz is also making progress on its cost reduction initiatives, which should help drive margins and earnings growth going forward. The company has targeted $2 billion in cost savings by 2024 and is on track to achieve that goal. This, combined with price increases, could greatly help the company to resist and at least stay in line with inflation.

Looking ahead, management is looking to grow its business through its fast-growing foodservice category, which is growing in the U.S. among teens with expanding partnerships with quick service restaurants, including its partnership Jack in the Box. As shown below, KHC also partners with top QSR brands in international markets, which are experiencing an even faster growth rate.

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KHC Foodservice Growth (Investor Presentation)

KHC also appears to be actively taking steps to enable faster, localized decision-making and streamline the organization to take advantage of its scale, as management highlighted at the Bank of America Global Consumer Conference (BAC ) last month :

We learned from the mistakes we made in the past. I think for the company, if I had to highlight one aspect, it was very siloed. For example, we had aspects, often the supply chain and the business side, operating independently in many ways. Many business units in the United States, but also in countries, are not taking advantage of the scale that we have as a company. So that has changed a lot. This has changed with over 50% of the leadership team coming from outside with experience in their functional areas

And then we are really proud of ourselves of the agility that we operate. I mean, I think you could say that we’re not a company with a lot of bureaucracy, probably one of the least if not the least, among its peers, leaving the decision on execution to be local, either in the United States or internationally, which is very important, really for the agility of decision-making. So taking advantage of this large-scale agility is something very important to us, and we experience it on a daily basis.

Meanwhile, KHC maintains a BBB-grade credit rating and has taken steps to deleverage its balance sheet, with a net debt to adjusted EBITDA ratio of 3.3x, below 3.6x and 4.5x at the start of 2021 and 2020, respectively. This supports the respectable dividend yield of 4.2%, which comes with a low payout ratio of 57%. I see room for a lower dividend with further balance sheet deleveraging.

Risks for KHC include the potential for supply chain disruptions with high energy prices and a tight labor market. In addition, increased pressure from private labels could hurt the profitability of KHC’s premium brands.

Nonetheless, I see value in KHC at the current price of $38.37 with a forward PE of 14.2. Analysts on the sell side have an average price target of $43.67 and Morningstar has a fair value estimate of $51. This implies a potential one-year return of between 18% and 37% including dividends.

Key takeaway for investors

Kraft Heinz appears to be actively taking steps to enable faster, localized decision-making, and has targeted $2 billion in cost savings by 2024. The company also partners with top QSR brands in international markets , which are experiencing an even faster growth rate. . I see value in KHC shares at the current price for long-term investors, while receiving a well-covered dividend during the continued rally.

About Ellie Cohn

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