EUR 850.00 For Business Accounts Only

Morningstar | Kraft Heinz Shakes Up Executive Ranks as It Works to Sauce Up Sales Gains; Shares Attractive

Still reeling from a rash of unfavorable headlines that came to light during its fourth-quarter earnings announcement two months ago surrounding a profit contraction, an SEC investigation into its procurement accounting, and a reduction in its quarterly dividend to $0.40 per share from $0.625, no-moat Kraft Heinz announced its CEO Bernardo Hess would be stepping down from the top spot to return to 3G Capital (which acquired Heinz in 2013, orchestrated the merger between Kraft and Heinz in 2015, and still maintains a significant stake in the combined entity). Hess is to be replaced by Miguel Patricio on July 1, who has spent the past two decades at wide-moat AB InBev, serving as chief marketing officer from 2012 to 2018.

We’ve been critical of Kraft Heinz’s stewardship of shareholder capital, which we rate as poor. In our view, the firm’s languishing returns on invested capital and declining sales trends point to a management team that has been prioritizing near-term cash flows and outsize profitability at the expense of its long-term competitive position (as it has failed to direct sufficient resources to support its intangible assets), spending a mere low-single-digit level of sales on research, development, and marketing versus the mid- to high-single-digits level its peers expend. However, unlike its past leader, Patricio does not have an affiliation with 3G, and his initial rhetoric suggests a commitment to reigniting sales by fueling further investments behind its brands (with a focus on innovation that aligns with evolving consumer trends and marketing its new fare), in line with our expectation for Kraft’s brand spend to tick up to a mid-single-digit range over our 10-year explicit forecast. We don’t anticipate any change to our $60 valuation or stewardship rating on this announcement alone as we await details on Patricio’s intended strategic agenda. However, we still view shares as undervalued given the pronounced pullback the last few months.

Kraft Heinz has yet to file its 2018 10-K with the SEC, in light of its ongoing investigation, which management attributes to its procurement accounting (including vendor agreements). After an internal investigation, Kraft Heinz reversed previously recorded savings of $25 million in the fourth quarter. Despite this, it doesn’t appear to be a pervasive issue, given the small size, relative to its cost base of $12 billion spent annually excluding key commodities.