Kraft Heinz stock builds value for shareholders: buy on the dip

Key Points

• Kraft Heinz shares are moving lower following a tepid report that includes improving cash flow and capital returns. 
• The stock is in deep-value territory and yields nearly 4.5% with revenue growth and a wider margin in the forecast. 
• Analysts are warming to this name and may continue the trend in 2024, driving it to a multi-year high. 

The Kraft Heinz Company NASDAQ: KHC Q4 report is not the stuff of legend but reveals several details income investors should heed. Among them are improving margins, favorable guidance, and cash flow, which suggests an inflection point is at hand for this consumer staple. The takeaway is that Kraft Heinz expects to improve its margin as the year progresses, forecasts growth, and the first dividend increase in years is closer than ever. Even without a dividend increase, this 4.45% yielding stock is a reliable payer, cheap to buy, and has the tailwind of share repurchases to help support the price action in 2024. 

Kraft Heinz has a tough quarter; growth to resume soon

Kraft Heinz had a tough quarter in Q4 due to shifting consumer habits and push-back on higher prices. Even so, the 7.1% YOY decline in revenue looks worse than it is due to the tough comp to last year. The company’s revenue was up 10% last year, aided by an extra 53rd week worth more than 600 basis points of the decline. The revenue is also short of the Marketbeat.com consensus, but the miss is slim, offset by the 53rd week, and margins and guidance matter most in this report. 

Segmentally, all segments produced a GAAP decline in revenue, but the adjusted comps are better. North America fell a mere 0.3%, Kraft Heins fell -0.7%, and International grew 7.1%. Margin and earnings are the brightest spots in the report. The company widened its gross margin on a GAAP and adjusted basis by at least 240 basis points to grow GAAP earnings and outperform on an adjusted basis. The adjusted $0.78 is down 8.2% compared to last year, but most of the loss is due to the extra week. It’s worth 690 basis points of the contraction. 

As tepid as the Q4 results are, the FY results and guidance are positive. The takeaway is that Q4 is the trough in the earnings cycle, and 2024 is forecasted to have an upswing that outpaces the consensus estimates. The company guided for 0% to 2% organic revenue growth aided by volume gains in the back half. Earnings are expected to grow at the accelerated rate of 1% to 3%, which puts the analysts' consensus at the low end, strengthening the capital return outlook. 

Kraft Heinz improves balance sheet and value

Kraft Heinz's top-line growth was sluggish in 2023, but its cash flow growth wasn’t. The company reported $4 billion for the period and $3 billion on a year-to-date basis, up 60% and 90%, respectively. Cash flow was used to improve the balance sheet while paying its dividends and repurchasing shares. The cash balance was increased by 34%, aiding net-leverage reduction. Net leverage fell to the target 3X, freeing up cash flow in future quarters for reinvestment, possible dividend increases, and repurchases. 

Repurchases totaled $0.455 billion in the quarter, including $0.155 billion to offset the dilutive effect of share-based compensation. The diluted share count is down only 0.08% at the end of Q4, but this was the first quarter of repos since 2018; there is about $2.7 billion left under the $3 billion authorization, so repurchases could be robust in 2024. Regardless, 2023 activities improved the shareholder equity by 1.7%. 

Analysts are warming up to Kraft Heinz 

The analysts' activity in Kraft Heinz began to warm in 2023, which should continue in 2024. The caveat is that analysts' activity was slight, a trend that may also continue in 2024. As it is, the thirteen analysts tracked by Marketbeat rate the stock at Hold and see it trading about 15% higher with the post-release drop in share prices. 

Two critical details are that the stock picked up several new analysts over the last six months and received several upgrades, suggesting the company is on track with its turnaround. Another is that the post-release drop in share prices aligns with the analysts' lowest price target, which may be a floor for the action. 

Shares of KHC are down about 2% in premarket trading and may fall further. The closest target for solid support is another half point lower, near $35.30. If the market can not find support at that level, it could fall to the bottom of the trading range. In that event, KHC would present a deep value and high yield of over 5%. Otherwise, the market will buy the dip soon and may drive the market to a new multi-year high before June.