After a wild ride for
stock, it still isn’t time to buy just yet. At least according to Deutsche Bank analyst Steve Powers. He resumed coverage of the maker of Velveeta and Jell-O with a Hold rating. His price target for shares is $31, a little lower than where the stock trades currently. Powers just doesn’t see enough sales growth, despite any energy new CEO Miguel Patricio could bring to the company.
The swings in Kraft Heinz stock (ticker: KHC) have caused investors a lot of indigestion over the past year. The stock’s 52-week high is almost $50. The low is about $25. On Thursday, the stock was up 0.7% to $31.82. A big asset write-down—essentially admitting that the benefits of the original Kraft and Heinz combination wouldn’t be achieved—as well as a new CEO fueled the volatility.
“In many ways, KHC is the poster-child for the Food industry’s past missteps,” wrote Powers in a Thursday research report. “After years of aggressive cost-cutting—but not enough top-line/brand reinvestment—attempted (but failed) M&A, talent drain/turnover, supply chain mis-executions, and financial restatements, [Kraft Heinz] s now pivoting to reinvent its core capabilities.”
Kraft and some other packaged-food companies have a bit of a crisis on their these days. After all the cost cutting—usually called the 3G model, named for the private-equity fund that started taking a more aggressive view toward corporate costs—the industry now is thinking about spending money to make money. Top-line sales growth is becoming the thing managers want to achieve.
Powers models Kraft Heinz top-line sales growth at only about 1% for the next few years. Slow growth is one reason he values the company for about 12 times his estimated forward earnings.
Things could improve for Kraft after recent management changes—Patricio took over in July. But uncertainty keeps Powers on the sidelines. The analyst believes the stock is stuck at least until the company presents a new strategic vision some point in the first quarter of 2020.
With the company in turnaround mode, any strategic plan articulated by Patricio will likely include asset sales, debt reduction, and improving core operations. Those are core turnaround tenets, similar to steps taken by new
(GE) CEO Larry Culp during his first year at the helm of the iconic American manufacturer.
Patricio, however, could get a break, and the stock could rally in January—just because Kraft shares are down a lot in 2019. Kraft Heinz stock is down about 26% year to date, far worse than comparable returns of the
Dow Jones Industrial Average
But a January jump would be a relief rally resulting from the end of tax-loss selling—when investors sell stock that are well below their cost basis to generate short- or long-term capital-gains losses to offer gains in other areas of their portfolios. After that, investors will take a hard look at what the new CEO says.
Write to Al Root at [email protected]