Why Is Kraft (KHC) Up 0.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Kraft Heinz (KHC). Shares have added about 0.5% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Kraft due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

The Kraft Heinz Company reported first-quarter 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Moreover, sales improved year over year. However, earnings declined from the year-ago quarter’s figure.

Q1 in Detail

Adjusted earnings per share of 58 cents surpassed the consensus mark of 54 cents. However, the bottom line fell 12.1% year over year due to decline in other income along with unfavorable changes in non-cash equity award compensation costs. Also, higher taxes were deterrent.

Net sales increased 3.3% year over year to $6,157 million. Also, the figure surpassed the Zacks Consensus Estimate of $6,142 million. Net sales growth included 1.1% and 1.8% unfavorable impacts of currency and divestitures, respectively. Organic sales rose 6.2% on the back of strong consumer demand stemming from to the coronavirus pandemic.

Pricing was up 1.6%, driven by price improvements in the United States and International markets. Volume/mix increased 4.6% on the back of increased at-home consumption.

Operating Highlights

Gross profit of $1,858 million declined 7.6% year over year and gross margin came in at 30.2% in the reported quarter.

Adjusted EBITDA was down 1.1% to $1,415 million in the quarter due to higher general corporate costs along with reduced demand from Canada region.

Segment Discussion

United States: Net sales of $4,495 million increased 6.4% year over year. During the quarter, pricing moved up 2.4% owing to better prices in certain categories. Volume/mix increased 4% on strong growth in various categories like condiments and sauces, ready to drink beverages, and nuts to name a few. However, lower shipments in cold cuts, natural cheese and domestic foodservice acted as deterrents.

The segment’s adjusted EBITDA increased 6.2% to $1,209 million which includes contributions from increased demand related to the COVID-19 pandemic. Higher prices and volumes more than offset the adverse impacts from volume/mix, key commodity cost inflation and increased supply chain expenses.

Canada: Net sales of $361 million declined 19.8% year over year, which included unfavorable impact of divestitures to the tune of 20.7% and an unfavourable currency impact of 1.3%. Nevertheless, organic sales increased 2.2% year over year driven by increased demand related to the coronavirus outbreak. Pricing dipped 6.4% due to higher trade expenses and reduced prices in foodservice. Volume/mix moved up 8.6% owing to growth in products such as peanut butter and pasta sauce. However, weakness in coffee and reduced foodservice shipment were headwinds.

Segment adjusted EBITDA declined 54% to $55 million due to unfavorable pricing and higher supply chain costs.

International: Net sales of $1301 million increased 1.3% year over year, which included unfavorable impact of divestitures to the tune of 1.1% and an unfavourable currency impact of 4.5%. Organic sales grew 6.9% year on year. Pricing inched up 1.7% owing to better prices in Latin America, Australia and the U.K. Volume/mix was up 5.2% on growth in retail consumption in both developed and emerging markets. However, reduced shipments in Asia and foodservice were a drag.

Adjusted EBITDA increased 2.5% to $245 million on higher organic net sales.

Financials

Kraft Heinz ended the quarter with cash and cash equivalents of $5,403 million, long-term debt of $31,531 million as well as total shareholders’ equity of $51,009 million.

In a separate press release, the company announced a quarterly dividend of 40 cents per share, which is payable on Jun 26 to shareholders of record as of May 29.

Outlook

For second-quarter 2020, the company anticipates a low to mid-single digit year over year organic net sales growth. During the second quarter, adjusted EBITDA is expected to grow at a mid-single digit on a constant-currency basis. This outlook reflects increased demand from retail customers owing to greater in at-home consumption, especially in developed markets. Also, the outlook takes in account lower demand in foodservice channels worldwide.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

Currently, Kraft has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Kraft has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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