1 More Reason To Avoid Kraft Heinz After Earnings
Back In September I showed you 2 Reasons To Avoid Kraft Heinz to protect your retirement portfolio…
Today, I show you 1 More Reason To Avoid Kraft Heinz after its latest earnings…
Below is a brief recap of what I said in September about avoiding its stock. If you want to read the previous articles in full, use the links above.
2 Reasons To Avoid Kraft Heinz
- It’s Got An Enormous Amount of Debt
As of this writing Kraft Heinz (KHC) is a $36.5 billion market cap food and drink manufacturer. It’s the 3rd largest food and drink manufacturer in North America… And the 5th largest worldwide.
Some of its famous brands include.
- Oscar Mayer
- Heinz Ketchup
- Kraft Macaroni and Cheese
- Kraft Mayonnaise
Among many others.
Its brands are so powerful that an estimated 89% of United States households have Kraft Heinz products in their homes.
So far during this pandemic food companies have done well because people are eating at home more.
And so is Kraft.
- Revenue was up 3.8% in the year to year 2nd quarter to $6.65 billion.
- And earnings per share was up 2.6% in the year to year 2nd quarter to $0.80 per share.
But Kraft’s got a major problem that’s plagued it since 2015…
An enormous amount of debt.
Its most recent quarterly data showed it has $2.8 billion in cash. While it has $28.9 billion in short term and long-term debt and capital leases.
Its debt is 10.3X higher than its cash levels. And 79.2% of its entire market cap as of this writing.
2. $15.4 Billion In Write Downs Already
Intangibles are things like brand names and trademarks.
Yes, these are valuable because Kraft has been around for so long that generations of people have grown up with the brands above.
Powerful brand names and trademarks allow companies to charge higher prices for their products. This leads to higher revenue, profits, and cash flows which are all wonderful.
But Kraft’s intangible assets are not as valuable as they used to be because there’s now more competition than ever. Often at cheaper prices than Kraft Heinz’s products.
This was shown last year when Kraft had to write down $15.4 billion worth of these intangible assets because they weren’t as valuable anymore.
When a company writes down an asset it removes that same amount – $15.4 billion in this case – from the balance sheet. And this lowers the value of the entire company.
Think of write downs like setting money on fire…
As soon as the pen ink dries on the write down, the money is gone immediately.
And due to enormous and growing competition its likely to write down these assets further.
The write downs were so bad, that it led the Great Warren Buffett to admit that he overpaid for Kraft Heinz stock during the merger in 2015.
This thesis to avoid Kraft Heinz continued to play out after it released its most up to date quarterly earnings on October 29th, 2020.
Sales company wide rose 6% in the year to year quarterly period to $6.4 billion.
While operating profit fell 2.8% in the year to year quarterly period to $1.15 billion.
And Earnings per share fell 33.8% in the year to year quarterly period to $0.49 per share.
Earnings fell because Kraft is selling its global cheese businesses for $3.3 billion. And as part of this transaction, its recognizing a $1.8 million write down for goodwill.
This write down dropped earnings and again lowers the book value of Kraft as mentioned in more detail above.
While sales rising is great… I expected this due to more people eating at home during this pandemic.
And while I expected more write downs sometime in the future… I didn’t expect they’d come this fast.
Because of this large decrease caused by yet another write down – and more likely to come as mentioned in the previous article – continue avoiding Kraft Heinze stock after its latest earnings.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.