The Kraft Heinz Company

My Disclaimer
I am a value investor. I am not a licensed or registered investment professional. I currently own shares of the company mentioned in this post. Financial statement data was obtained from the company’s latest SEC 10-K filing.

Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Intent
The intent of this post is to provide you with a brief overview of my various company valuations so you can determine if you have any investment interest in this company at this time.

What They Do
Kraft Heinz is a food and beverage company, manufacturing and marketings food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products. Competitors include Campbell Soup Company, Conagra Brands, Inc., and Nestlé S.A.

Recent Acquisitions and Divestitures
In January 2019 the company acquired 100% of the outstanding equity interests in Primal Nutrition, LLC, a better-for-you brand primarily focused on condiments, sauces, and dressings, with growing product lines in healthy snacks and other categories. The acquisition price was $201 million. In March 2018 the company acquired 100% of the outstanding equity interests in Cerebos Pacific Limited, an Australian food and beverage company. The acquisition price was $244 million. In December 2019, the company was in negotiations with a prospective buyer for 100% of the equity interests in a subsidiary within its Rest of World segment. The selling price was $55 million, all cash.

Short-Term Target
My current short-term target for the stock is $32.46, with an initial trailing stop set at $26.48. Based on a recent price of $26.88, upward price movement will find resistance at $28.19 and again at $29.33, with final resistance found at $30.80. Downward price movement will find support at $26.49 and again at $25.61, with final support found at $25.23.

Volatility Value
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. My current beta ratio for this stock is 0.78 and my volatility value for the stock is $65.

Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources will distort a company’s earnings and consequently its fair value. Investors should always explore the sources of a company’s earnings to better understand potential valuation impacts. Considering the company’s earnings, 0% of net income came from tax benefits, while 33% of net income came from sources unrelated to day to day operations.

Momentum Target
My momentum target for the stock is $49. Momentum targets are determined by integrating a company’s most recent annual EPS and year-over-year earnings growth, with the current yield of a 10-year treasury. Momentum investing often requires investors to trade in stocks that have already enjoyed significant gains while making no allowances for overall market corrections or the sustainability of a company’s earnings.

Growth Target
My current growth target for the stock is $18. Growth targets are determined using a company’s year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.

Five Year Growth of $10K
If you had invested $10K in this stock five years ago (12/30/14), you would have received 230 shares of stock with a cost basis of $43.57 per share. Had you held the stock for five years and then closed your position (12/30/2019), you would have closed at $31.71 per share. During that holding period you would have collected $486 in regular and special dividends, and your initial $10K investment would have returned to you $7,278 a loss of 27% excluding regular and special dividends.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 4.37%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 41 insider trades involving 31,341,367 shares of stock. Of those 41 insider trades, 39 were Buys involving 6,259,416 shares of stock, and 2 were Sells involving 25,081,951 shares of stock, creating an insider buy to sell ratio of 0.2 to 1.

Prior Average Valuations
My average valuation for the prior five year period of FY 2014 through FY 2018 was $37. The stock price during that time period averaged $65, earnings averaged $3.50 per share, and the average PE Ratio was 19. The current PE Ratio is 11.

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $49 and my equity value (market cap plus cash less debt) is $5, making my E2E Ratio, 0.10.

Fair Value Investing
Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $45. My worksheet target prices are derivatives of my fair value estimate.

The Kraft Heinz Company (Nasdaq: KHC) – FYE 12/2019 – INITIATE – The stock is currently trading at levels in line with or below my most recent $27 initiate target. Please See Linked PDF Worksheet

There you are, short and, hopefully, to the point.

Wax
Revised on 02/17/20