Kraft Heinz: A Boring, Defensive Stock (NASDAQ:KHC)

Kraft Heinz (NASDAQ:KHC) is as interesting as trying to get the last drop of ketchup out of the bottle. That might not be a bad thing in this market.

Company Profile

KHC is a food manufacturer and beverage products, including condiments, cheese and other dairy products, coffee, meat, sauces, juices and other food products. It sells its brands in grocery stores, convenience stores, warehouse stores, pharmacies, mass merchandisers, as well as in the food industry (such as places like restaurants, bakeries, and sports venues.)

The company owns six brands that generate $1 billion or more in revenue. These include Heinz, Kraft, Philadelphia Cream Cheese, Oscar Mayer, Lunchables and Velveeta. It also owns other brands such as Jell-O, Maxwell House, Claussen, Kool-Aid, Capri Sun, Ore-Ida and Gray Poupon among others.

The company divides its offerings into 7 Platforms: Elevation Tastes, Fresh Fast Foods, Easy Meals Made Better, Real Food Snacks, Flavored Hydration, Indulgent Desserts and more. Condiments and sauces are the largest product category, accounting for more than 30% of sales, while cheese and dairy make up about 15% of sales.

Opportunities and risks

Product innovation and brand extension is one of the biggest opportunities for a food company like KHC. The food giant has some flagship brands that it can use to introduce new product variants as well as more convenient delivery. Considering the hectic pace of today’s lifestyle, KHC has focused especially on the areas of On-the-Go and Quick with Quality. In the On-the-Go category, the company’s Lunchables brand has grown strongly and introduced other items that can be taken from home to work or school, such as mac and cheese cups.

In addition, the company is also introducing a quick crisp technology as well as faster home baking products. Speaking at the CAGNY conference in February, Executive Vice President Carlos Abrams-Rivera said:

“We now know that consumers are looking for high-quality food that is convenient to prepare. So here we focus on 2 areas. First, what we call crispy. Now how many of you have put something in the microwave, then take it out and think it’s a hot mess? So we’ve actually solved this pain point and we’ll be demoing it during lunch. Now, Crisp is not a single product with a patented technology that would allow us to expand into multiple categories.

“And then there’s Home Bake. Think of all the dishes cooking together in the same oven for 30 minutes, just by pressing a button. All, every one of those dishes, will come out together and look exactly and taste exactly like home. This is the magic we have with Home Bake. And with Home Bake, we’re solving another pain point for consumers. Families can choose from their favorite main, side or vegetable dishes. We use a proprietary technology platform that brings its new taste and convenience to the world.”

KHC is also pushing for more wellness foods from emerging brands such as Primal Kitchen and through a joint venture with NotCo. While people want fast food, there is also a trend towards healthier foods as well as more plant-based offerings. These are the trends that KHC is trying to capitalize on and has grown the Primal Kitchen brand more than twofold since acquiring it in late 2018.

KHC is also looking to grow its portfolio of Mexican food products through the Delimex brand. At CAGNEY, Abrams-Rivera said:

“In our Mexican strategy, we will offer consumers options from end to end, through sauces, snacks, meals. For Delimex in particular, we collaborate with suppliers to facilitate innovation, ideation and development. This strategy brings marketing that previously took 3 years to 6 months. And today at lunch you have the chance to taste our delicious Taquitos Delimex, with improved quality and almost double the filling. Our products and our marketing are all inspired by what you should see on the streets of Mexico.”

The food service industry is another key focus for KHC and the company believes it can grow sales at a 7% CAGR in this channel. The company said it has a big advantage in this space over peers because it has a 50-50 split between front-of-house and back-of-house, while peers are generally only 25 percent front-of-house. This gives its brands more recognition.

Product innovation, increased penetration and new channels will be the biggest drivers in the foodservice channel going forward. Surprisingly, the company said it is only in half of the top 50 QSRs in the US, often with only one SKU. This is one area he will attack. KHC will also look to innovation to drive more food service businesses, particularly within sauces. The company runs a program called the Heinz Sauce Drop in which it will release new sauces at a prominent restaurant partner, similar to how NIKE ( NKE ) does shoe drops. It is also looking to enter new channels such as schools.

Emerging markets are another area of ​​growth, both in the food sector and in retail locations. In addition to its flagship global brands, the company also has regional brands such as Masters in China and Hemmer in Brazil. Speaking about KHC’s international opportunity at the CAGNBY conference, Area President Rafael Oliveira said:

“We are growing very fast in emerging markets, but they still only account for less than 10% of our global sales. We have a huge opportunity. Take our key growth platform, Taste Elevation, as an example. There is a $60 billion market. And the CAGR has been growing at a rate of 6% every year. We grew twice as fast and still only have 5% of the Taste Elevation market in emerging markets, compared to 13% in developed markets. It is obvious. There are many more opportunities to pursue.”

In the short term, pricing was the biggest driver of revenue as the company posted a 15.2% increase in pricing in Q4, which offset a -4.8% decline in sales volumes. The prices will help boost 2023 organic sales above its long-term target of 2-3%.

Turning to risk, while CPG companies are recession-proof, they are not completely immune to a weakening macro environment. During times of economic weakness, consumers will trade with private labels.

In addition, the perception of private labels has changed as domestic brands have become better quality and cheaper than national brands. While KHC is in some categories that are more defensible, it’s still something they struggle with, and tighter consumer budgets aren’t helping.

KHC also have a few categories that have struggled, such as Powdered Beverages and Frozen Snacks and Appetizers. Both categories lost market share and both were also supply constrained.

ASSESSMENT

KHC shares are currently trading at about 10.8 times 2023 consensus EBITDA of $6.12 billion and 11.4 times 2024 consensus of $6.35 billion.

It trades at a forward PE of 13.8x versus the FY24 consensus of $2.73.

Revenue is expected to grow by 2% in each of the next two years.

At the CAGNY conference call, the company reaffirmed its long-term targets for adjusted EPS growth of 6-8%, adjusted EBITDA growth of 4-6% and sales growth of 2-3%.

The company trades at one of the lowest multiples among food peers.

Conclusion

In short, KHC is a slow growth defensive CPG company. Given its size, nothing will change that. And stocks haven’t performed particularly strongly over the past five or ten years.

That said, in today’s environment, it’s not necessarily a bad thing. The company will grow revenue more than normal due to price increases and has a yield of over 4%. However, with higher risk-free rates, CPG companies should theoretically trade at lower multiples.

If you’re looking for safety, it’s an option, but so are money markets paying ~4.5%. I rate KHC stock as a “Hold”.