The Kraft Heinz Co (KHC, Financial) has recently experienced a daily gain of 3.36% and an Earnings Per Share (EPS) of 2.56. However, the stock has suffered a 3-month loss of 12.03%. The question that arises for investors is: Is the stock modestly undervalued? This comprehensive analysis aims to answer this question by examining the company's valuation, financial health, profitability, and growth prospects.
Company Introduction
The Kraft Heinz Co emerged in July 2015 from a merger between Kraft and Heinz, becoming the third-largest food and beverage manufacturer in North America and the fifth-largest globally. The company's portfolio includes renowned brands like Oscar Mayer, Velveeta, and Philadelphia. The majority of its sales (85%) come from the retail channel, with a growing presence in the foodservice sector. The company has a broad distribution network in Europe and emerging markets, contributing 20%-25% to its consolidated sales base. Its products are sold in over 190 countries and territories.
At present, The Kraft Heinz Co trades at $32.52 per share, while its GF Value, an estimation of fair value, stands at $38.61. This discrepancy suggests that the stock might be modestly undervalued.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The GF Value Line on our summary page gives an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
According to the GF Value, The Kraft Heinz Co stock appears to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Examining Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this risk, investors must review a company's financial strength before deciding to purchase shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. The Kraft Heinz Co has a cash-to-debt ratio of 0.05, ranking worse than 87% of 1800 companies in the Consumer Packaged Goods industry. Its overall financial strength is rated 5 out of 10, indicating that The Kraft Heinz Co's financial strength is fair.
Profitability and Growth Analysis
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. The Kraft Heinz Co has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $27.10 billion and Earnings Per Share (EPS) of $2.56. Its operating margin is 18.38%, which ranks better than 91.29% of 1838 companies in the Consumer Packaged Goods industry. Overall, the profitability of The Kraft Heinz Co is ranked 7 out of 10, indicating fair profitability.
Growth is one of the most crucial factors in the valuation of a company. The company's 3-year average revenue growth rate is worse than 67.15% of 1717 companies in the Consumer Packaged Goods industry. The Kraft Heinz Co's 3-year average EBITDA growth rate is -1.4%, which ranks worse than 62.75% of 1530 companies in the Consumer Packaged Goods industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, The Kraft Heinz Co's return on invested capital is 4.8, and its cost of capital is 5.65.
Conclusion
Overall, The Kraft Heinz Co (KHC, Financial) stock shows every sign of being modestly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 62.75% of 1530 companies in the Consumer Packaged Goods industry. To learn more about The Kraft Heinz Co stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
