Warren Buffett (Trades, Portfolio)’s Kraft Heinz Co. (KHC, Financial) shot up more than 9% in late afternoon trading after it released stronger-than-expected results for the second quarter, showing credible signs of a turnaround after years of declining revenues.
Before mid-day, the stock stood at $64.62 per share after falling by up to 17% in trading year to date. It stood at $64.78 a share, up 9.06% late Friday afternoon.
Executives who lead the world’s fifth-largest food and beverage company told market watchers that the favorable performance stemmed from higher input costs and favorable impacts from acquisitions and net divestures.
Various factors played a role in the company’s positive results, which were released this morning. The company has engaged in a massive cost-cutting effort to the tune of millions of dollars in recent years. It also has repackaged its products to appeal to more health-conscious consumers. Hot dogs are healthier and unnatural ingredients have been removed from products.
As a result, declining revenues in the U.S. have started to inch upwards, company executives say. And there is even better news to come. "We expect our profitability to improve by year-end, with further momentum into 2019," Kraft Heinz CEO Bernardo Hees said in a prepared statement on Friday.
Wall Street beats
Net sales in the second quarter that ended on June 30 stood at $6.686 billion, compared to $6.637 billion in the prior-year period. That was an increase of 0.7%, the company reported.
Kraft Heinz reported basic earnings of 62 cents per share on $756 million in profit compared to the prior-year’s quarter of 95 cents per share on $1.159 billion.
Adjusted earnings per share increased $1 per share on 98 cents per share in the prior year. Analysts had predicted 92 cents per share.
In the U.S., the company reported a sales decrease of about 1.9% to $4.5 billion. However, the number topped analysts’ expectations of $4.43 billion.
The company provides iconic brands like Kraft, Heinz, ABC, Capri Sun, Jell-O, Lunchables, Maxwell House, Oscar Mayer and Planters.
Kraft Heinz is one of Buffett’s major holdings. The company made up more than 10% of his portfolio of stocks, according to the most recent filings. Other guru shareholders included Steven Cohen (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), David Rolfe (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Jeff Auxier (Trades, Portfolio) and Tom Russo (Trades, Portfolio).
Improvements over time
The conglomerate hasn’t seen growth in revenue or earnings in a decade, according to GuruFocus data. However, it reported earnings growth of 5.3% in the last 12 months and revenue growth of 0.40%, which signals it is turning the corner. It also reported operating income growth of 11.3% in the last 12 months.
GuruFocus' chart on revenue and net income shows progress over the last three years.
Over the last three months, the stock climbed 11%. It traded below its historical value based on the median price-sales ratio chart by GuruFocus, though the chart is incomplete. The 52-week range is about $54 to $87 a share.
The company has a very healthy business situation, as its Piotroski F-Score of 7 indicates.
Kraft reportedly was trading at 7.09 times price-earnings on Friday. The ratio is higher than 88% of its peers in the Global Packaged Foods Industry. It was trading at 15.87 forward price-earnings, which is higher than 59% of its peers. The price-book ratio was 1.19, which is higher than 64% of its peers. The price-sales ratio of 3.04 is lower than 81% of its peers.
Kraft Heinz reported a dividend yield of 3.86%, which is ranked higher than more than 80% of its peers in the industry. It has a payout of 27%.
In terms of market cap, the company is second in size only after Procter & Gamble Co. (PG, Financial), which has 23.4% of the industry. Kraft, with a market cap of $78.16 billion, holds 8.9% of it. In third place is Mondelez International Inc. (MDLZ, Financial) at 7.4%. Colgate-Palmolive Co. (CL, Financial) holds 6.7%, GuruFocus industry overview page showed.
Analysts are predicting earnings of $7 billion on revenue of more than $26.6 billion in 2020. That equates to earnings per share of $4.17.
The Peter Lynch chart suggested the stock of Kraft Heinz is selling below fair value, though the chart is incomplete.
GuruFocus ranked it 5 out of 10 in financial strength and profitability and growth.