Kraft Heinz: A Boring, Defensive Stock

Kraft Heinz (NASDAQ:KHC) is as exciting 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 maker of food and beverage products, including condiments, cheese and other dairy products, coffee, meats, sauces, juices, and other grocery products. It sells its brands at grocery stores, conveniences stores, warehouse stores, drug stores, mass merchants, as well as to the foodservice industry (such as places like restaurants, bakeries, and sporting venues.)

The company owns six brands that generate $1 billion or more in revenue. They 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 Grey Poupon, among others.

The company separates its offerings into 7 platforms: Taste Elevation, Fast Fresh Meals, Easy Meals Made Better, Real Food Snacking, Flavorful Hydration, Easy Indulgent Desserts, and Other. Condiments and sauces is its biggest product category, representing over 30% of sales, while cheese and diary accounts for around 15% of its 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 iconic brands that it can leverage to introduce new variations of products, as well as more convenient delivery. Given the hectic pace of today’s lifestyle, KHC has been particularly focused on the areas On-the-Go and Quick with Quality. In the On-the-Go category the company’s Lunchables brand has been growing strongly, and its introduced other items that can be taken from home to work or school, such as single-serve cups of mac and cheese.

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

“Now we know consumers are looking for high-quality food that is convenient to prepare. So here we're focusing on 2 areas. First, what we call crisp. Now how many of you have put something in the microwave, then you pull it out and think it's a hot mess? So we actually have solved that pain point, and we will be demoing this during lunch time. Now crisp is not a one-off product with an ownable, patent technology that would allow us to expand into many categories.

“And then there's Home Bake. Think about all the dishes cooking together in the same oven for 30 minutes with just the push of a button. All of them, each of those dishes, will come out together and look exactly and taste just like homemade. That's the magic that we have with Home Bake. And with Home Bake, we are solving another pain point for consumers. Families can choose from their favorite main, side or veggie dishes. We are using an ownable technology platform that delivers its new to the world taste and convenience.”

KHC is also pushing into more wellness foods from emerging brands such as Primal Kitchen and through a joint venture with NotCo. While people want quick food, there is also a trend towards healthier foods as well as more plant-based offerings. These are trends that KHC is looking to capitalize on, and it's grown the Primal Kitchen brand over twofold since it acquired it at the end of 2018.

KHC is also really looking to drive its Mexican food portfolio as well through its Delimex brand. At CAGNEY, Abrams-Rivera said:

“In our Mexican strategy, we will offer options for consumers from end to end across sauces, snacks, meals. For Delimex, in particular, we are collaborating with suppliers to facility innovation, ideation and development. This strategy is bringing commercialization that previously had taken 3 years down to 6 months. And today at lunch, you have a chance to taste our delicious Delimex Taquitos with improved quality and nearly double the filling. Our products and our marketing all inspired by what you should see in the streets of Mexico.”

The foodservice industry is another main focuses for KHC, and the company thinks it can grow sales at a 7% CAGR in this channel. The company said it has a big advantage in this space versus peers because it has a 50-50 split between front of the house and back of the house, while peers are generally only at 25% front of the 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 was only in half of the top 50 QSRs in the U.S., often times just having one SKU. This is an area it will attack. KHC will also look towards innovation to drive more foodservice business, especially within sauces. The company is running a program call Heinz Sauce Drop where it will drop new sauces at a prominent restaurant partner, similar to how NIKE (NKE) does shoe drops. It’s also looking to get into new channels such as schools.

Emerging markets is another area of growth, both in foodservice and at retail locations. Beside its iconic 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, Zone President Rafael Oliveira said:

“We are growing very rapidly in emerging markets, but still only represents less than 10% of our global sales. We have a huge opportunity. Let's take our key growth platform, Taste Elevation, as an example. There's $60 billion market up for grabs. And the CAGR has been growing at a rate of 6% every year. We've been growing twice that fast and still only hold 5% share of Taste Elevation market in emerging markets versus 13% in developed markets. It's obvious. There's so much more opportunity to go after."

In the near term, pricing has been the big revenue driver, as the company saw a 15.2% increase in pricing in Q4, which offset a -4.8% decline in sales volumes. Pricing will help lift 2023 organic sales above its 2-3% long-term target.

Turning to risk, while CPG companies are recession resistant, they are not completely immune from a weakening macro environment. Consumers will trade down to private label brands during periods of economic weakness.

In addition, the perception regarding private label brands has also been shifting, as in-house brands have become better quality and are cheaper than national brands. While KHC is in some categories that are more defensible, it is still something it is fighting, and tighter consumer budgets doesn’t help.

KHC also have some categories that struggled, such Powdered Beverages and Frozen Snacks and Appetizers. Both these categories have lost market share, and both have been supply constraint as well.

Valuation

KHC stock currently trades around 10.8x the 2023 consensus EBITDA of $6.12 billion and 11.4x the 2024 consensus of $6.35 billion.

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

Its projected to growth revenue by 2% each of the next two years.

At the CAGNY conference, 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 multiple among food product peers.

Conclusion

In a nutshell, KHC is a slow growth defensive CPG company. Given its size, nothing is going to change that. And the stock hasn’t been a particularly strong performer over the past five or ten years.

That said, in the current environment, that’s not necessary a bad thing. The company will grow revenue more than normal due to price hikes, and it does have an over 4% yield. However, with a 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% as well. I view KHC stock as a "Hold."