Kraft Heinz stock is in deep value territory

The Kraft Heinz company NASDAQ: KHC The fourth-quarter report isn’t the stuff of legend, but it reveals several details that income investors should pay attention to. Among these are improving margins, favorable guidance and cash flow, which suggests an inflection point is near for this consumer staple. The bottom line is that Kraft Heinz expects to improve its margin over the course of the year, expects 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 benefit of share buybacks to help support price action in 2024.

Kraft Heinz is having a tough quarter; growth will resume soon

Kraft Heinz had a tough fourth quarter due to changing consumer habits and higher price holdouts. Even so, the 7.1% year-over-year revenue decline looks worse than it did due to last year’s tough situation. The company’s revenue rose 10% last year, helped by a 53rd week increase worth more than 600 basis points of decline. Revenue is also below the Marketbeat.com consensus, but the revenue miss is minimal, made up for by the 53rd week, and margins and guidance matter more in this report.

Segmentally, all segments delivered a GAAP decline in revenue, but adjusted comps are better. North America was down just 0.3%, Kraft Heins was down -0.7% and International was up 7.1%. Margin and profits are the brightest points of the report. The company expanded its gross margin on a GAAP and adjusted basis by at least 240 basis points to boost GAAP earnings and outperform on an adjusted basis. The adjusted $0.78 was down 8.2% from last year, but most of the loss was due to the extra week. It is worth 690 basis points of the contraction.

As tepid as the fourth quarter results are, the fiscal year results and outlook are positive. The bottom line is that the fourth quarter represents the low point of the earnings cycle and 2024 is expected to see a recovery that exceeds consensus estimates. The company drove organic revenue growth of 0% to 2%, aided by volume gains in the second half. Earnings are expected to grow at an accelerated rate of between 1% and 3%, which places the analyst consensus at the low end, strengthening the outlook for capital returns.

Kraft Heinz improves balance sheet and value

Kraft Heinz’s revenue growth was slow in 2023, but cash flow growth was not. The company reported $4 billion for the period and $3 billion year-over-year, up 60% and 90%, respectively. The cash flow was used to improve the balance sheet by paying dividends and repurchasing shares. The cash balance was increased by 34%, favoring the reduction of net financial leverage. Net leverage fell to the 3X target, freeing up cash flow in future quarters for reinvestments, possible dividend increases and buybacks.

Repurchases totaled $0.455 billion in the quarter, of which $0.155 billion was to offset the dilutive effect of stock-based compensation. The diluted share count fell just 0.08% at the end of the fourth quarter, but this was the first repo quarter since 2018; About $2.7 billion remains under the $3 billion authorization, so buybacks could be substantial in 2024. Regardless, 2023 assets improved net worth by 1.7%.

Analysts are closing in on Kraft Heinz

Analyst activity at Kraft Heinz began to heat up in 2023, which is expected to continue into 2024. The caveat is that analyst activity has been poor, a trend that could continue into 2024. As it stands, the thirteen analysts tracked by Marketbeat rate the stock a Hold, and we will see it trading up about 15% as share prices decline post-release.

Two critical details are that the stock has attracted several new analysts in the last six months and has received several upgrades, suggesting that the company is on track with its turnaround. Another is that the post-release drop in stock prices aligns with analysts’ lowest price target, which could be a cap on the stock.

KHC shares fell about 2% in premarket trading and could fall further. The closest target for solid support is another half point lower, near $35.30. If the market fails to find support at that level, it could drop to the bottom of the trading range. If so, KHC would feature deep value and high yield above 5%. Otherwise, the market will buy the dip soon and could push it towards a new multi-year high before June.

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