Kraft-Heinz: Still Undervalued And Yielding 4.0%
Kraft-Heinz (NASDAQ: KHC) has been quietly working on a transformation over the past three years and it is starting to gain momentum. After years of divestiture and portfolio re-shaping, the balance sheet is in the best condition its been in since the merger, and the company is on track for growth. Trading at 14.5X its earnings it is also a deep value relative to its more-mature Consumer Staples (NYSEARCA: NYSE) peers and it is also the highest paying dividend in the sector.
Kraft-Heinz payout is worth more than 4.2% with shares trading at $36.75 and it is a safe payout. The company cut the distribution way back in 2019 as part of the repositioning effort so it is unlikely to be cut now without some major change to the fundamentals. The more likely scenario is the company will continue to pay its current distribution while it builds on the momentum and strengthens the balance sheet, a scenario that should lead to distribution increases within the next few years.
Leaner, Meaner Kraft-Heinz Proves Resilient In Q2
Kraft-Heinz had a great quarter in Q2 despite the tepid nature of the results relative to the analyst's expectations. The company reported $6.55 billion in net revenue for a decline of 1.1% over last year (including divestitures) and beat the Marketbeat.com consensus by 300 basis points. The news is compounded by the organic figures which show sales are up by 10.1% versus last year with only a 2.3% decline in volume offsetting the 12.4% in price increases. On a regional basis, the North American segment grew 9.8% organically on a 13.1% increase in prices while the International segment advanced a stronger 11.0% on a 10.3% increase in prices. International sales were aided by a 0.7% increase in volume due to acquisitions over the past year.
Moving down to the margin, both the GAAP and adjusted margins shrank versus last year and at the gross and operating level but there are numerous charges in play affecting the comparison. The takeaway is that FCF fell primarily due to one-off events that have little to no bearing on the health of the underlying business. Examples of these are higher taxes in relation to divestitures and rebuilding inventory, two actions that help strengthen the long-term outlook.
The guidance is a little mixed, however, and reflects a trend that is developing among the staples group, Kimberly-Clark (NYSE: KMB) being the most recent example. The company upped its target for revenue on the back of results, expected pricing actions, and business momentum but held the target for adjusted EBITDA flat. This reveals the expectation for higher costs, as well, and opened the door to underperformance given the inflationary conditions plaguing the economy. The takeaway, however, is that income is expected to be stable relative to the prior outlook and financial performance is expected to improve sequentially for the next two quarters at least.
The Technical Outlook: Kraft-Heinz Falls To Key Support
Shares of Kraft-Heinz fell more than 7.5% in the wake of the earnings report but this is a knee-jerk reaction to the guidance. The move has the price down at a key support level, however, and offers an attractive entry point for income investors. The risk is that price action will continue to fall and break through the $34.70 level and keep falling. In that scenario, price action could fall back to $32 or even lower. If, however, the market can sustain support at or above $34.70 the stock will most likely remain within the trading range it has maintained for the last 18 months. 
