Food Processing Stocks

Kraft Heinz Co Valuation – Initial Coverage $KHC

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Kraft Heinz Co (KHC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Kraft Heinz Company is a food and beverage company. The Company is engaged in the manufacturing and marketing of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products. The Company’s segments include the United States, Canada and Europe. The Company’s remaining businesses are combined as Rest of World. The Rest of World consists of three segments: Asia Pacific; Latin America, and Russia, India, the Middle East and Africa (RIMEA). Its brands include Heinz, Kraft, Oscar Mayer, Planters, Philadelphia, Velveeta, Lunchables, Maxwell House, Capri Sun and Ore-Ida. The Company’s products are sold through its own sales organizations and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, drug stores, value stores, bakeries, pharmacies, mass merchants, club stores, foodservice distributors and institutions.

KHC Chart

KHC data by YCharts

[level-free]
To read the details of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

Learn More About Premium Membership

[/level-free]
[not-level-free]

Downloadable PDF version of this valuation:

ModernGraham Valuation of KHC – February 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $108,703,005,268 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.95 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 15366.67% Pass
6. Moderate PEmg Ratio PEmg < 20 42.03 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.90 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.95 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -63.65 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

EPSmg $2.12
MG Growth Estimate -4.07%
MG Value $0.76
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $30.77
MG Value based on 0% Growth $18.04
Market Implied Growth Rate 16.77%
Current Price $89.19
% of Intrinsic Value 11797.87%

Kraft Heinz Co does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $2.91 in 2012 to an estimated $2.12 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 16.77% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Kraft Heinz Co revealed the company was trading above its Graham Number of $58.75. The company pays a dividend of $2.9 per share, for a yield of 3.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 42.03, which was above the industry average of 24.74. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-44.38.

Kraft Heinz Co scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$44.38
Graham Number $58.75
PEmg 42.03
Current Ratio 0.95
PB Ratio 1.90
Current Dividend $2.90
Dividend Yield 3.25%
Number of Consecutive Years of Dividend Growth 2

[/not-level-free]

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $8,943,000,000
Total Current Liabilities $9,414,000,000
Long-Term Debt $29,980,000,000
Total Assets $121,080,000,000
Intangible Assets $104,138,000,000
Total Liabilities $63,438,000,000
Shares Outstanding (Diluted Average) 1,228,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.24
Dec2015 -$0.34
Dec2014 $1.74
Dec2013 $4.51
Dec2012 $2.75
Dec2011 $3.00
Dec2010 $5.98

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.12
Dec2015 $1.82
Dec2014 $3.13
Dec2013 $3.63
Dec2012 $2.91
Dec2011 $2.59
Dec2010 $1.99

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

Other ModernGraham posts about related companies

Dr Pepper Snapple Group Inc Valuation – January 2017 $DPS
J&J Snack Foods Corp Valuation – Initial Coverage $JJSF
Sysco Corporation Valuation – January 2017 $SYY
General Mills Inc Valuation – January 2017 $GIS
Coca-Cola European Partners PLC Valuation – January 2017 $CCE
Archer Daniels Midland Company Valuation – January 2017 $ADM
McCormick & Company Valuation – January 2017 $MKC
Conagra Brands Inc Valuation – December 2016 $CAG
Seneca Foods Corp Valuation – Initial Coverage $SENEA
Ingredion Inc Valuation – Initial Coverage $INGR

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back To Top