The Kraft Heinz Company: On The Path To Slow Recovery

Summary

In FY2021 YTD, the Kraft Heinz Company reduced its long-term debt by $5.02B, with a further $5.49B reduction projected by 2024.

Kraft Heinz aims for $2B operational cost savings by 2024 while further investing in its marketing/advertising efforts and capital expenditures.

We discuss whether investors should add KHC stock now.

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Oli Scarff/Getty Images News Investment Thesis

The Kraft Heinz Company ( KHC ) develops and manufactures food and beverage products globally. Since 2017, the company has reported stagnant revenues without any notable YoY growth. Furthermore, in 2021, KHC reported severe cost inflation in its raw materials and transportation charges, due to global supply chain issues. To remain profitable, the company increased the selling price of its US portfolio while also streamlining its global portfolio by eliminating 1.1K products.

KHC intends to achieve YoY organic growth in the range of 1% to 2% with adj. EBITDA growth in the range of 2% to 4%. However, historical data shows otherwise, with a CAGR of -0.02% over the past five years, while consensus estimates projected a further deceleration in its revenue growth at a CAGR of -1.71% over the next three years.

We discuss whether investors should add KHC stock now. Kraft Heinz Is On A Mission To Repay Its Debts

KHC Long-Term Debt. Data source: S&P Capital IQ

In 2018, KHC had massive long-term debts of $30.77B, at a net debt/ EBITDA ratio of 4.19x. As a result, the company has one of the highest net debt/ EBITDA ratios in the Consumer Staples industry, compared to other competitors such as Kellogg Company at 3.1x and Hormel Foods Corporation at 1.4x. Nonetheless, the company has been earnestly repaying its debts since FQ1’21, by buying back up to $5.8B of its outstanding notes on three separate occasions. As a result, as of FQ3’21, KHC reduced its long-term debts to $22.94B at a net debt/ EBITDA ratio of 3.42x. The company managed this feat primarily due to the divestiture of its businesses , such as the cheese and nuts businesses, in September 2020 and February 2021, respectively.

In September 2020, KHC sold its natural cheese businesses, with the transaction expected to close by the end of 2021. The sale generated $3.2B of cash and $140M of lifetime license for certain products under the Cracker Barrel brand owned by Groupe Lactalis. Previously, KHC’s cheese businesses generated approximately $1.8B in annual sales and $270M in EBITDA. In February 2021, KHC also sold its nuts businesses, with the transaction closed by FQ2’21. Prior to sales, KHC’s nut businesses reported $1.1B in annual sales and $200M in EBITDA. Its sale generated $3.4B in value for KHC. KHC Free Cash Flow. Data source: S&P Capital IQ KHC EBITDA Margin & EBITDA. Data source: S&P Capital IQ

Otherwise, the company has not reported substantial earnings for debt repayment, with $195M of Free Cash Flow (FCF) with a sum of cash and equivalents at $2.27B in its balance sheet for FQ3’21. In addition, its EBITDA margin has been on a general downtrend too. In FQ3’21, KHC reported EBITDA margins of 23%, a decline of 4.5% QoQ, and 16% YoY. KHC Projected Net Debt and Net Debt/ EBITDA Ratio. Data source: S&P Capital IQ

As a result, KHC’s outlook looks better as more and more of its debts are repaid. It will lower the company’s overall liabilities while improving its net debt/ EBITDA ratio. Consensus estimates project that its net debt/ EBITDA ratio will improve to 2.61x by FY2024. Nonetheless, we are uncertain about FY2022’s debt repayment plans with its declining EBITDA margins as KHC is expected to report a deceleration in revenue growth moving ahead. KHC Reported Stagnant Revenue Growth

KHC Revenue. Data source: S&P Capital IQ

Over the past 5 years, KHC reported tepid revenue growth, at a CAGR of -0.02%. In FQ3’21, the company reported $6.32B of revenue, in line with historical revenue. For FY2021, KHC raised its guidance for adj. EBITDA from $6.1B to over $6.2B, representing a potential decline of -7% YoY. In the past three quarters, KHC recorded $4.76B of adj. EBITDA, with projected FQ4’21 EBITDA in line with FQ3’21 levels. Nonetheless, KHC has been consistently outperforming consensus estimates for EPS over time.

KHC Projected Revenue. Data source: S&P Capital IQ

Over the next 3 years, consensus estimates project that KHC will report a further deceleration in its revenue growth […]

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