Pros and Cons to Buying Kraft Heinz Co (KHC) Stock

Anyone who’s ever rolled through the middle aisle of a grocery store knows the names “Kraft” and “Heinz” — and their everyday purchases are likely boosting the profits for Kraft Heinz stock.

Ore-Ida, Oscar Mayer Jell-O, Planters, Smart Ones, Maxwell House and Velveeta, among others, all fit under the Kraft Heinz Co. ( KHC) umbrella, which is secured by two of two of the most popular food brands in the country — Kraft macaroni and cheese and Heinz ketchup. According to the company, Kraft Heinz sells more ketchup packets annually than there are people on earth, and Kraft has been selling its mac and cheese products since 1937, when meat and dairy products were harder for depression-era families to obtain.

After a successful merger in 2015 with Heinz, Kraft Heinz is now a company with some of the most iconic food products consumed around the world. “There are three basic needs everyone has, shelter, clothes, and food, and while we may be able to do without a house, or clothes, we cannot survive without food,” says Dale Gillham, an Australia-based investment analyst who closely tracks KHC stock. “So, anyone manufacturing and selling basic food items like Kraft Heinz has a very sticky client base.”

[See: 9 Food and Beverage Stocks for an Investor’s Feast.]

As a result of the merger, Kraft Heinz is now the fifth-biggest food and beverage company in the world. “And as mergers often go, it takes a while to realize their full potential,” Gillham says.

Can KHC reach that potential? Maybe — if it continues to buy up competing brands, experts say.

KHC stock at a glance. Kraft Heinz stock is selling at $54 per share, and could be heading lower after analysts criticized its ability to close the deal on a Unilever ( UL) buyout, and with high debt levels and a burdensome pension income picture. Still, there’s much to like about KHC stock ( Warren Buffett is a big investor) and many other investors view KHC as a company with a great brand and a stock with cheap value these days.

With a one-year consensus stock price outlook of $67 per share, Kraft Heinz certainly has some room for upward growth — plus it offers a solid dividend of 4.2 percent.

Yet not everyone agrees with that sentiment. Dara Mohsenian, an analyst at Morgan Stanley, just issued an “underweight” call on KHC, and pegs the stock’s target price at $52, noting the high debt level and slow sales. Organic sales growth is languishing at an 0.04 percent rate on a year-to-year basis.

“Their margin performance remains incredible,” says Greg Kuczynski, a research analyst at Janus Henderson Investors. “While the top line has not been impressive, they have not performed meaningfully worse than many others in their sector, and yet they’ve accomplished this with a profit margin that is approximately 50 percent better than other players in the space, at approximately 30 percent EBITDA margin versus 20 percent for the rest of their competitors, roughly speaking.”

The stock price is down nearly 30 percent on a year-to-date basis, although rumors persists that Kraft Heinz is in the market for a major acquisition as the consumer goods sector continues to consolidate.

Pros of buying KHC stock. Kraft Heinz shareholders seem to be generally pleased with the stock.

“As a financial advisor and current stock holder of Kraft Heinz, I believe there is long-term value in the company,” says Paul D. Snow IV, president of Snow Financial Growth in Madisonville, Louisiana. “Yes, Kraft Heinz has experienced growth challenges since their 2015 merger, but is still a strong company in the food and beverage sector.”

One challenge Kraft Heinz has to overcome is increasing freight costs, and another, is the upswing in healthier food trends, Snow says. “These challenges affect the cost of manufacturing and related cost to consumers,” he says.

Snow also says he believes that KHC consumers are brand loyal. “Kraft Heinz is a household name and a company that can withstand and overcome the current challenges it faces,” he says. “They need to focus on improving their internal management and address the current healthier food trend and in turn will see growth.”

[See: 10 Value Stocks to Buy in an Unpredictable Market.]

Cons to buying KHC stock. The fact that company insiders have divested over 20 million shares over the past 90 days is seen as a negative factor for Kraft Heinz stock going forward. That’s an under-the-radar sentiment, even though Kraft Heinz CEO Bernardo Hees says business is brisk.

The company has also inched into the political arena, with Hees citing President Donald Trump’s ongoing trade and tariff battles with China, Mexico, and other countries as a significant concern for the company.

“We are seeing a tighter labor market and we see tariffs pressuring our business,” Hees says. “But we do see public consumption brightening in recent months and we have been hiring and are generally pleased about the economy.”

As a global company, Hees says he is a big believer in global trade and thinks it benefits consumers in general. “We have a U.S.- based supply chain and we mass export to Mexico and Canada, and abroad. Consequently, tariffs are an issue — every time you plan a new manufacturing plant or transportation initiative and big investments like that, you want to have an idea what’s going to happen in 10 or 15 years. That’s why we need trade talks to come to an end.”

Where Kraft products are placed in grocery retail outlets may be working against the stock price, investment experts say.

“We have great respect for the Kraft Heinz management team and the long-term track record now of consumer goods entities successfully integrating and operating companies in the staples sector,” Kuczynski says. “However, we’ve steered clear of this name because of the exposure to U.S. center-of-store packaged food, which we view as an increasingly difficult market segment.”

Kraft needs to evolve its business over time to be more exposed to emerging markets and household and personal care brands (which is precisely what Unilever would have done, if a buyout agreement had been completed), Kuczynski says. “I’d be more constructive on the name, but it seems based on their recent commentary that they are likely again considering doubling down on U.S. food exposure,” he says.

The bottom line on KHC stock. Getting the grocery games right is a big priority for Kraft Heinz going forward.

“Turning around the secular pressure on center-of-store packaged food is a herculean task,” says Kuczynski. “It’s not clear that Kraft Heinz nor anybody else in the sector has discovered the answer to this challenge.”

[See: 10 Reasons Investors Shouldn’t Panic About Stocks.]

Kuczynski says he’s seeing younger generations eating out more, changing their eating habits (perceptions of what’s “healthy” are rapidly evolving), and becoming more skeptical of the traditional branded food offerings.

“Re-positioning the portfolio to deal with these challenges will require brilliant marketing and product innovation, and/or meaningful transactions (like buying brands in growing categories, selling businesses in declining categories) which are typically very dilutive to returns,” he says.

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