Quite apart from the ongoing rise in inflation, Kraft Heinz is focused to a long-term business plan and potential.
KHC operation analytics
In 2022, Kraft Heinz, like its peers, benefitted from customers' proclivity to eat at home during the pandemic, with retail accounting for 85% of total revenues.
The company's primary goal is to infiltrate households and increase the amount of repeat purchases, — in other words to build a regular client base. In this context, the company is directed to enhance brand investment and achieve long-term efficiency (marketing and product innovation). This enables a more adaptable reaction to changing market conditions.
Kraft Heinz shifted away from its earlier objective of maximizing profits at any price and toward a strategy of constantly promoting profit growth. The company expects to save $2 billion in efficiency costs by 2024 (including $400 million in fiscal year 2022), although experts believe this is done to free up resources for investing in its product line rather than to improve earnings.
As previously said, the firm maintains its focus on more efficient marketing spending, seeking to boost marketing spending by 30% between the fiscal years 2020 and 2024, which can enhance the variety of its brands and partnerships with retailers. According to analysts’ predictions, research, development, and marketing spending will average 6% of sales each year, or roughly $1.7 billion, during the next ten years, up from 4.5% in the previous five.
With the outbreak of the COVID-19 epidemic, Kraft Heinz focused its production assets on the items with the biggest turnover and even attracted more costly manufacturers, which was a logical decision to strengthen relations with the retail trade, despite the reduction in earnings.
Inflation (connected to commodities, labor, packaging, and transportation) is making inroads, and Kraft Heinz may struggle to pass the expenses to customers without cutting volumes to save costs. In the past, Kraft Heinz showed interest in raising leverage. If the corporation continues on this trend, it may find it difficult to reinvest in its business while still returning cash to shareholders.
The share price has not moved significantly, so the market continues to disparage Kraft Heinz. Nevertheless, experts find this action unreasonable, considering Kraft Heinz's strong net sales in the third quarter 2022 of 11.6%, which is 6.4% higher than the third quarter of 2019. In contrast to sales, profit margins deteriorated: adjusted gross and operating margins fell by 250 and 170 basis points respectively, to 30% and 18%.
Researchers expect a fair value of $51 (excluding a $1-2 rise in time value), with long-term sales growth of 2-3% per year and poor operational profit for the next 20 years. Yet, considering that the shares are trading at a 30% discount to their intrinsic value and offer a 4% dividend yield, there seems to be all the reason to assume that investors should include this company's stock in their portfolios.