Kraft Heinz Stock Rises as Analysts Firm Up Sentiment

Key Points

• Kraft Heinz analysts are warming to its future as it quietly builds a moat with brand and innovation.
• Analysts view the stock as a moderate buy and undervalued, trading beneath the low end of their range. 
• Cash flow, free cash flow, and capital returns support Kraft Heinz's dividends and stock buybacks.

Kraft Heinz's NASDAQ: KHC share price has struggled with traction for years despite its turnaround, balance sheet improvements, and growth outlook. The stock is cheap, undervalued, and high-yielding, making it a perfect target for value and income investors. The latest downturn in the action is more of the same, presenting another opportunity to load up on the stock. As tepid as the price action has been, the market has sustained its trading range since 2020 and is unlikely to set a new low. Because the analysts' sentiment is firming, a rebound is likely to begin with a touch to the $31.50 level, and it could begin soon. 

Analysts See Value in Kraft Heinz Stock

The analysts' activity in Kraft Heinz stock is light, but that is unsurprising given the nature of business relative to more exciting markets such as tech, the cloud, and AI. However, light as it is, a sufficient number of analysts are covering the stock to assume a relatively high level of conviction in the Moderate Buy rating. 

Takeaways from the data reported by MarketBeat include sentiment firming from Hold to Moderate Buy within the last six months and a price target down compared to last year but moving up from its recent lows. The critical details are the value. The analysts view this stock as a deep value, trading 10% below the low end of the target range and 25% below the consensus. Trading at 10x earnings, it also has a deep value relative to leading consumer staples companies and its historical average.

The latest update comes from Morningstar, which issued a very complimentary report. In their view, the company has “broken the shackles of the past” and is building a moat based on its brand strengths and improving profitability. The firm upgraded the stock to Narrow Moat, which assumes a competitive advantage with a 10-year time horizon. 

Other recent activity includes Piper Sandler, which upgraded to Overweight from Hold with a price target of $42. The $42 target is above the consensus estimate due to increasing visibility in the food service segment. Piper Sandler sees Kraft Heinz building on its innovation pipeline, growing share, and deepening penetration to sustain segment-leading growth for the foreseeable future. 

Analysts Set a Low Bar for KHC's Q2 2024: Forecast Growth in Back Half

As bright as the outlook is for Kraft Heinz, the analysts have set a low bar for Q2 results, so outperformance is expected. Analyst have only lowered their estimates since last quarter when guidance for the year was reaffirmed. As it is now, the consensus is for revenue to fall a little more than 1% compared to last year and for the margin to narrow, contrary to guidance and Q1 strengths. The critical detail will be the new guide; analysts forecast the company to return to growth in the 2nd half and for the margin to improve this year and next. 

The margin is among the highlights of the Q1 report and a driver of shareholder value. The company reported wider gross, operating, GAAP, and adjusted earnings, up 1.5% despite the top-line contraction. The critical details are the cash flow and free cash flow, which improved by 60% and 116% to aid balance sheet improvement and fund share repurchases. 

Kraft Heinz Capital Return is a Catalyst for Higher Share Prices

As tepid as the market for KHC shares is, there is an upside for investors that capital returns will unlock. Kraft has paid a steady dividend since 2018, worth 3.75% to 4.5% over the past three years, as the stock moves sideways within its trading range, and now it is repurchasing shares. 

Operational improvement has allowed the board to reinstate share repurchases above merely compensating for share-based compensation, and improvements are expected to continue. In this environment, KHC's share count will decline this year, and in the foreseeable future, dividend increases will be back on the table. The company may not move to increase the payment this year, but with margins improving, growth in the forecast, and solid FCF, it is only a matter of time.