Food Processing Stocks

Kraft Heinz Co Valuation – March 2019 #KHC

Company Profile (excerpt from Reuters): The Kraft Heinz Company (Kraft Heinz), incorporated on February 8, 2013, 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 Latin America and Asia, Middle East and Africa (AMEA). The Company provides products for various occasions whether at home, in restaurants or on the go. The Company’s brands include Heinz, Kraft, Oscar Mayer, Philadelphia, Planters, 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, including hotels, restaurants, hospitals, healthcare facilities and certain government agencies.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of KHC – March 2019

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 $39,177,731,650 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.22 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 -72.29% Fail
6. Moderate PEmg Ratio PEmg < 20 40.12 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 0.76 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 1.22 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 18.61 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 $0.80
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $11.62
MG Value based on 0% Growth $6.81
Market Implied Growth Rate 15.81%
Current Price $32.15
% of Intrinsic Value N/A

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 or growth over the last ten years, and 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 $1.82 in 2015 to an estimated $0.8 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 15.81% 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 below its Graham Number of $50.71. The company pays a dividend of $2.5 per share, for a yield of 7.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 40.12, which was above the industry average of 26.89. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-34.95.

Kraft Heinz Co receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$34.95
Graham Number $50.71
PEmg 40.12
Current Ratio 1.22
PB Ratio 0.76
Current Dividend $2.50
Dividend Yield 7.78%
Number of Consecutive Years of Dividend Growth 4

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $9,091,000,000
Total Current Liabilities $7,432,000,000
Long-Term Debt $30,873,000,000
Total Assets $103,627,000,000
Intangible Assets $85,986,000,000
Total Liabilities $51,724,000,000
Shares Outstanding (Diluted Average) 1,220,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.69
Dec2018 -$8.39
Dec2017 $8.95
Dec2016 $2.81
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 $0.80
Dec2018 $0.22
Dec2017 $4.20
Dec2016 $1.98
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

Kraft Heinz Co Valuation – May 2018 $KHC
5 of the Worst Stocks to Invest In – February 2017
Kraft Heinz Co Valuation – Initial Coverage $KHC

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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.

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